Lord Falconer of Thoroton: My Lords, how convenient they were depends on who you are. Bow Street Magistrates' Court was incredibly convenient for the Bar; Marylebone Road, where the 10-court site is currently planned to be, will be convenient for more people, including more solicitors, because it has a wider catchment area.

Baroness Sharples: My Lords, when will the new courts will be available?

Lord Redesdale: My Lords, the report says that75 per cent of all energy is used in space and water heating. If that is so, are the Government considering making technologies such as solar thermal heating mandatory in all new buildings? It is a low-carbon solution for water heating that would be cost effective and cut down on fuel poverty.

Lord Rooker: My Lords, I do not know about the Energy Saving Trust, but the noble Baroness is right. We can do all we can with new build—at about 200,000 new dwellings a year; though that figure is probably a bit high—but we have a stock of about25 million dwellings. Dealing with the stock is much more important than new build. We have to do both but dealing with the stock is extremely difficult for reasons that the noble Baroness has just given. It requires innovation and will be not be a one-size-fits-all solution.

Lord Rooker: My Lords, this is the second of two orders which started life under the elected devolved Administration in Northern Ireland. I apologise in advance if my speech is longer than I would normally make on such an order but, given its history and importance, it is necessary to put a fair bit on the record before the debate starts.
	Although I did not say this when speaking to the first order, it would have been much better if the devolved Assembly had been back in November as planned and it had carried on with this work. That is by far the best place for it to happen. In the absence of that, the Government are continuing with the reform programme. I shall give further detail on why that is the case.
	The order puts in place the legislative framework required to improve the quality of the water we drink and to regulate how the waste water we produce is treated. It also better safeguards the environment and radically improves the delivery of water and sewerage services to consumers. The arrangements which it introduces will ensure that the ongoing capital investment programme in the water and sewerage infrastructure is sustained into the future without impacting on the funding needed for other priority public services.
	The draft order's main elements are: establishment of a company, Northern Ireland Water Limited, under 100 per cent government ownership but functioning on a commercial basis to supply water and sewerage services; a definition of the duties and powers of the company to supply water and sewerage services; the establishment of a modern regulatory system for the water utility by widening the remit of the current energy regulator in Northern Ireland to include water issues; the imposition of duties on the company and the regulator to deal with consumer interests while also broadening the role of the Consumer Council to include water and sewerage issues; setting up a framework for charging that will guarantee that the direct charges for water and sewerage services will be fair and reasonable with safeguards for the most vulnerable and low-income households through a reduced tariff; and modernisation of the environmental regulatory regime within which water and sewerage services will be provided.
	The policies that the draft order gives effect to have been subject to a wide-ranging impact assessment and public consultation over the past three and a half years. Indeed, over this period some 13 separate consultation or impact assessment documents have been published. Latterly, the draft order was issued for consultation over a 12-week period. The 46 responses to the consultation have been published on the Department for Regional Development's water reform website. The Government are grateful to those who have made substantive submissions regarding the order.
	I will make some general observations on the response to water reform. The Government appreciate that the introduction of new charges is never popular—that is a plain statement of the obvious. However, I hope that there is now a universal appreciation in modern society that water—clean, safe, drinkable water—is not free, and the disposal of our waste water cannot possibly be a free good. Hundreds of millions of pounds are required each year to provide water to our homes and to treat appropriately the waste water that we produce. Billions of pounds of continuing investment are needed to sustain and improve those services. So far, the Government have not received a viable alternative to the introduction of domestic charges that will ensure that this necessary future investment can occur, let alone continuing the existing investment that is ongoing and of a very substantial rate indeed.
	For the elucidation of that, I have brought a few figures with me. In the past three years to 2006-07, there has been some £629 million of investment and 26 projects have been completed. They vary from costing £122 million to as little as £400,000. Those 26 projects have been completed. There are11 projects under construction at present, at a total cost of £448 million. There is substantial investment going on by any stretch of the imagination in Northern Ireland. In the three years up to 2006-07, there have been 1,130 km of new and replaceable water mains, and 140 km of new and replaced sewers. The idea that there has been no investment in water by the Government is simply not on. The figures are there, and the new plants are there, to show that that is the case.
	An argument has been made that it would have been better for the difficult and contentious issues raised by water reform to be addressed by a devolved Administration. Indeed, as I have indicated, the devolved Administration were already grappling with the issues in 2002. That is where this work started. The previous Government here at Westminster tried and failed to introduce reform in the 1990s, so even the devolved Assembly's attempt was not the first to grapple with what was known to be a serious problem. Unlike our predecessors, we have not failed to tackle the issues. The devolved Administration may well have tackled them, but sadly it has taken us three and a half years to get to a position where there is a realistic prospect of devolution.
	Now, at the last minute, the parties are telling us to stop and let them deal with it. They had their chance. If this was the single most important issue, as some of them claim it is, that Assembly would have been back on 24 November, no messing about. It clearly was not the single most important factor, because the Assembly is not back. They have no plan to tell us when they would deal with it. Looking at the procedural timescale, there would have to be a ministerial proposal, which requires executive endorsement; the Assembly would have to put through the legislation, and so on. We are looking at a minimum delay of two years in introducing these reforms. That is a two-year hit. This is not a threat; it would be a two-year hit on other public services. There would be two years' lack of investment, and we would be two years closer to not meeting the GB standards in terms of water, which are not met in Northern Ireland at present. It would be two years closer to infraction fines from the European Union, which is why we must proceed now.
	Let us look briefly at the political realities. If we have devolved government by 26 March next year, as we sincerely hope we will, when the new Ministers will take the pledge of office, the Assembly could repeal this legislation. It will have the power to amend it asit wants. It will be within its ownership. But no Administration, even a devolved one of whatever shape, can avoid the inevitable need to invest in these essential services. By proceeding with this order, we are giving the parties the option of addressing reform now. If the order is defeated today by those who recognise the need for change, but fear their unpopularity, the option will be lost. It is as simple as that. It will be to the long-term detriment of Northern Ireland's public finances and services.
	No one wants to pay additional charges; I have not come here to argue that people do. I was in Northern Ireland at the weekend as duty Minister. I saw the adverts on the television and the posters. No one came up to me and said, "By the way, the water charges are a good idea and I really want to pay more". People did say that something had to be done, but that we are always doing it the wrong way; however, they did not come up with viable alternatives. We know that people do not want to pay additional charges.
	There is a popular misconception in Northern Ireland that people already pay for water through the rates. In fact, there is no direct connection between the regional rates and the cost of supplying water and sewerage services. It is also suggested sometimes—indeed,many times in my experience—that any legacy of underinvestment should be addressed before charges are introduced. I have just pointed out the level of investment that has taken place in the past three to five years and which is ongoing. The fact is that Northern Ireland's position is no different from that of anywhere else in the UK in that respect—and that ignores the investment of over £1 billion in the past five years.
	The reality that must be confronted is that the average household payment for services in Northern Ireland is approximately half that made by households in Great Britain. The truth is that Northern Ireland households need to make a greater contribution. We think that that is only fair. Some people say that the Government need to consider the relative poverty or higher costs in Northern Ireland, and I freely admit that some things are more expensive, while other things are cheaper. But a variety of indicators demonstrate clearly that Northern Ireland is not the most deprived region in the UK. People sometimes automatically assume that it is; but I can give examples, including average disposable weekly incomes, unemployment and nominal growth, that demonstrate that Northern Ireland is not the worst region in the UK. There are places in the UK where average weekly disposable incomes are less than in Northern Ireland; namely, the north-east and Wales. That tells you something about equality and fairness. Unemployment in Northern Ireland from May to June this year was 4.4 per cent, compared with the national average of 5.5 per cent. Northern Ireland had the second lowest unemployment out of 12 regions. So, on a variety of indicators, Northern Ireland is not the worst-off region.
	We are simply asking households in Northern Ireland to make a fair contribution. I shall provide some illumination on that, although I do not want to spend all my time quoting figures. For the avoidance of doubt, regarding the average level of household taxation in 2006-07, the average property charge per household in England and Wales is £1,043, in Scotland it is £958 and in Northern Ireland it is £668. For England and Wales, the average direct water and sewerage charge, in addition to the property charge, is £294 and in Scotland is £295. The total for property charges and direct water and sewerage in England and Wales is thus £1,337, in Scotland it is £1,253 and in Northern Ireland £668. That looks unfair, bearing in mind that some areas in the UK are less prosperous than Northern Ireland. It is a fact that Northern Ireland receives a higher share of public expenditure than anywhere else in the UK and the lowest share of local taxes and charges.
	The water charges will consist of a standing charge and a variable element based on capital values. The Government freely admit that no system is perfect, but we believe that the proposed arrangements will balance customers' ability to pay and their use of water and sewerage services. In very general terms, capital value direct charges to more affluent areas are more likely to produce lower bills for the less well off.
	We have also developed an affordability tariff. This is unique to Northern Ireland. It is designed to guarantee that no low-income householders need spend more than 3 per cent of their income on the new charges. Approximately 200,000 of the 650,000 households—30 per cent of households in Northern Ireland—will benefit from these measures, which will be funded by the Government and not the other water customers. I want to make that absolutely clear: this subsidy will be funded by the Government and not by the general customer base. The new rate relief was designed to help those not eligible for housing benefit but who were just above the new rating system threshold; it is to help poor people just above eligibility. Anyone in receipt of housing benefit, rate rebate and the new rate relief will receive categorised charges ranging from £90 to £180 per annum, depending on the value of their property. However, the charges will be phased in over three years. Therefore, the maximum bills for these people in 2007 and 2008 will range between £30 and £60 per annum. That is the reality.
	The order does not limit the duration of the affordability tariff—it is phased in over three years—and the Government are confident that a devolved Administration will have the necessary flexibility to deal with these matters in future. The poorest person in the cheapest house in Northern Ireland will pay £30 in that first year, £60 in the second and £90 in the third. The poorest person in the most expensive house will pay £60 in the first year and up to £180 in the third year. Those are the affordability tariff figures.
	The Government are committed to a long-term, managed transition to widespread metering. That is also a reality elsewhere in the UK; it is not compulsory, but this issue comes up in your Lordships' House from time to time. We want to do this as soon as possible, so we get to a situation where every household will have the option to select whether a metered tariff is best for them. It would be unfeasible, on logistical and economic grounds, to establish universal metering overnight. I had my ears bent about this over the weekend—that we would like to have a meter but the pensioners have got to come first. Initially, it will be targeted at pensioner households that request installation, and it will be installed in all new-build dwellings. The installation of the meter will, of course, be free of charge.
	One issue that has been raised in respect of this order is that the Government have a secret plan for privatising water. It has been suggested that the government company being established to deliver water and sewerage—referred to as the GoCo—is a preparation for privatisation. I want to be absolutely clear about this: the Government have ruled out the privatisation of water and sewerage services in Northern Irelandfor the foreseeable future. Furthermore, the order specifically provides that the Department for Regional Development—the company shareholder, owning100 per cent of the shares—cannot take action which would result in a change of control without the approval of the Assembly. Hence any change in the future status of the company will rest fully within the control of local elected representatives.
	In effect, this is a triple lock. This is because the company would have a view, and the devolved Minister in charge of that department would have a view and take any proposal to the Executive, who would have to agree; the Assembly would have to agree on cross-party, cross-community voting. Therefore, if any change took place in that way, it would be with the full-hearted consent of the elected, devolved Government in Northern Ireland. We have no plan for this. The argument that this is a pre-runner for privatisation that we the Westminster Government are going to push through does not bear examination.
	The legislation's aim is to enable water and sewerage services to be provided in the most economical way possible. The company will be held to account by the regulator in delivering an exceptionally demanding programme of efficiency improvements so that charges are as low as possible. Performance is currently worse than it was in England and Wales 16 years ago, so there is some way to go.
	Before I move on to the regulatory arrangements, it might be appropriate to raise some other issues. I want the House to be able to debate this matter with as much information as possible available. One issue is the business plan. This is not going to work; I shall stick to the speech that I was intending to make and I can come back to this later if need be.
	With regard to the regulatory arrangements, we think that the draft order provides a robust system of governance. It reflects best practice in up-to-date utility regulation and is beyond all comparison with the current arrangements, under which central Government are effectively the sole service deliverer and regulator. The position in Northern Ireland is completely unlike that in Great Britain.
	With regard to land disposal, we have been accused of not allowing independent regulation, but I want to make it clear that that is not the case. Article 217 of the draft order says that land disposal by the company—that is, the government company—is subject to departmental control. However, it allows us to give a general authorisation on disposal and, indeed, we will give that authorisation, making decisions on disposal entirely a matter for the independent regulator. There will be exceptions to accommodate the role of the environmental regulator, who covers environmental and heritage services, and land which was originally acquired compulsorily. But the department will not interfere and therefore there will be no conflict with its role as the shareholder in the government company.
	The proceeds of any disposal will be retained by the government company—that is, the water company—subject only to regulatory control. The fine detail is contained in the licence, on which we are consulting at present, but I give a commitment to look very sympathetically at any issues of regulatory independence that are raised in regard to disposal. I make it absolutely clear that the Government will be handing over to the regulators decisions on whether to dispose of assets.

Lord Rooker: My Lords, there are two aspects to that question, and I shall try to answer it from memory. With regard to land, I think that it will happen straightaway. As we understand it, regulators mainly regulate price. However, as I said, because the Government will subsidise the first three years at government cost, clearly the regulator will not regulate price for three years, so there is a dislocation between the timing of the regulator's powers coming into force on price and when they come in on other matters. The price is subsidised for three years, and I have explained how the Government have arranged that with the affordability tariff and a phasing-in over three years. That cost is carried by the Government, so the regulator will have nothing to do in that respect. Does the noble Baroness wish to intervene?

Baroness O'Cathain: My Lords, I thank the Minister. What, then, does the regulator do for three years?

Lord Rooker: My Lords, as I explained, the order sets out other areas where the regulator will have work. The regulator is regulating more than price—for example, I have just dealt with land disposal and other matters where the regulator will be involved.
	Having dealt with land regulation, I shall say a few words about general regulation. We believe that the policy set out in the document is consistent with the overall approach of ensuring independent regulation. We have already said that, where there is a choice between the department and the regulator as regards who does what, the regulator will exercise all enforcement powers from day one. However, there is no choice for the regulator with regard to price because the Government are subsidising it for three years—otherwise, it would make no sense for the Government to propose what they are doing. The only significant departure from the position in England and Wales concerns price controls during those three years. Otherwise the regulator will have all the powers that the water regulators have here. We will be subsidising consumer bills in that period and, by and large, the average bill of £100, rather than £300 because of this constraint, will be well worth having. The Government will subsidise for three years rather than have a free-for-all and let the regulator regulate, which would mean higher prices.
	We are committed to independent price regulation after the subsidised phasing-in period. After that, the regulator will take over. We shall not make the same mistake as we believe that the previous Government made with the Northern Ireland electricity industry. We have clearly tried to learn from that. I am not apportioning blame on a party matter. We have just learnt from the experience of electricity regulation in Northern Ireland. We will not set up the same sort of long-term contracts which have had the effect of locking down tariffs in a way in which the regulator cannot touch. The regulator will be free to operate once the charging powers go to him.
	The draft order introduces new rights for water consumers in Northern Ireland, guaranteeing standards on vital issues such as pressure and constancy. It also allows schemes to be made to compensate consumers where standards are not met. As in other areas, the regulator will take the lead there.
	On environmental matters, it has been broadly acknowledge that the draft order will improve the environmental compliance of water and sewerage services. Environmental groups have some specific concern about enforcement. Any measure to protect the company while it finds its feet will be limited in scope and duration. There is no comparison with the current situation in which Crown immunity limits effective action. It is important to ensure that the ongoing capital investment programme in new or improved treatment works and systems is delivered on the ground as soon and as effectively as possible.
	I fully accept that water reform is controversial. As noble Lords will know, it has been the subject of judicial review. I shall not read out the judgment, although others may wish to, as that would take quite a long time. Sixteen counts were taken before the judge, who declared that the applicant for judicial review failed on 15 of the 16 counts on which the Government were challenged. I can give a brief summary of each of the 15 if required to do so. There were grounds for success on the 16th ground, slender though it may be. But in relation to the discussion that took place after the judicial review about what would happen as regards how it would be dealt with by the courts—in other words the remedy—the judge simply agreed a declaration, which has been placed before your Lordships' House, setting out three of the points he wanted to raise.
	He also made a key point in the final paragraph that the court had issued the declaration to draw the narrow matters—I think I am entitled to say that—to the attention of Parliament so that Parliament may determine, as it sees fit, the appropriate action to take in relation to processing the draft order. The declaration confirms that the court has not invalidated anything which occurred up to and including the laying of the draft order on 9 October. However, I fully accept that it is controversial. I have not come here to say that this is a cheap and easy answer. If the order is not carried, that will put a hole in the budget for next year—2007-08—of £85 million to £90 million, which would be serious. These issues have remained unresolved for too long and we need the sustained capital investment in the infrastructure without drawing funding from other priority public services, such as health, education and transport. Those are the areas from which the money would come.
	Furthermore, if the order were not passed, it is likely—I put it no higher than that—that Northern Ireland would lose the right to the borrowing power won by the First and Deputy First Ministers in 2002, which currently provides up to £200 million of investment every year for Northern Ireland's public services. That is not to be sniffed at. I beg to move.

Lord Trimble: My Lords, I want to make clear what this amendment is not about. It would perhaps have considerably shortened the Minister's speech had I been able to say this to him before he started. My amendment does not indicate opposition to reform of the water service in Northern Ireland, nor does it in any way indicate opposition to the payment of charges. Both reform and payment are necessary. The Minister acknowledged that this started under the Administration whom I had the honour to head. We knew that it was a serious issue. I am sure Mark Durkan shares my view that one of the most significant things we did in office was to put in place the reinvestment and reform initiative—which the Minister referred to at the end of his remarks—which created a borrowing power for the Northern Ireland Administration designed to deal with this. Of course, we knew that the borrowing would have to be paid for by charges.
	Unfortunately, we did not get the chance to carry it much further. Privatisation was not in our mind, but we were conscious of the examples in Scotland and Wales, where water services operate commercially without being fully privatised. We would have looked closely at those examples. Speaking entirely for myself, I would have wanted to move towards metering as rapidly as possible, if for no other reason than general grounds of conservation. I am sure that, had the Administration remained in place, the issue could then have been dealt with. We would have carried this through and had it completely done and dusted by now—three and a half years have been lost since suspension.
	The Minister also referred to the legal action of the consumer council. I am glad that he did so, because a veil of silence was drawn over this in another place which did not, to my mind, pay due respect to the judgment of the court. I am delighted that the Minister has put that court judgment and declaration before Members of the House. If the Minister does not mind, I shall say that I think that he was misleading the House ever so slightly by trying to indicate that he had won 15-to-one on the points. A better indication of success or otherwise is the court's order as to costs: it awarded 80 per cent of the costs against the department, so the consumer council won four-to-one. That is a more balanced judgment on the matter.
	The court's declaration contained a reference to the Government's decision not to bring this matter before a Grand Committee. As a result of a discovery during the court action, it came up that the Government decided not to proceed with a Grand Committee hearing because they said that it would only involve the "repetition of entrenched views". I do not know where they would be. Maybe the Government were thinking of their own entrenched views, rather than those which we would have brought to the matter. We certainly do not have entrenched views on this.
	Leaving procedural issues aside for the moment, we have some serious concerns about the substance of the matter. The Minister touched on one when he referred to land disposal and privatisation. I intervened, asking him to make the power of the regulator absolutely clear from the word go. I am sorry to say that I had difficulty following his answer. I think he was saying that the regulator would have immediate power over disposals, but want him to come back to that in his wind up. It was not clear to me from what he was saying.
	On privatisation, one of the advantages of the consumer council's legal action was what came up in discovery. I heard what the Minister said; it was very familiar. I shall read from an e-mail sent by a senior civil servant to the Secretary of State's political adviser in September. It starts exactly as the Minister said in his speech:
	"Our line up to now has been that privatisation has been ruled out for the foreseeable future".
	It goes on—as the Minister also helpfully said—to state:
	"If necessary, we can go further and say categorically that this ministerial team will not privatise. (We have not deployed this publicly yet.) However, as you will know, the Treasury are pressing us to review whether there would be benefits from greater private sector participation in 2008. Such a review could conclude that there would be advantages to bringing in a private equity partner, which would mean selling a minority shareholding".
	So while the formal position of the Government is that they are not going to privatise, there is recognition of Treasury pressure in that direction and that, even as soon as 2008, we would see a partial privatisation. Selling a minority shareholding would get in underneath the safeguard that the Minister emphasised, so that safeguard regarding disposing of control of the company will not bite on what the Treasury is going to bring pressure to bear to do. As noble Lords well know, the Treasury has a habit of getting its way on these matters. It is therefore fair to say that while the present position of the Government is understandable for the foreseeable future—however long that may be—when we see the permanent position the Government, it quickly opens the door to partial privatisation and who knows what beyond that. There is considerable concern.
	One of the reasons for the procedural concern is that this is a major piece of legislation. It is a couple of hundred pages long. There has been a certain amount of consultation about it, but the most important questions are about matters that are not in the legislation, such as the licence. A draft licence was published only last Monday. Some people have been able to read it, but I have not. I have been given some information about it, but I doubt there are many noble Lords here today who have heard of or read the licence. It was not available for the proceedings in another place, although it has been published in time for the proceedings here.
	The strategic business plan has not been published. The consumer council received a draft in September, which I hope has been superseded. The expert advice we received was concerned about its viability. I do not know whether that concern is justified because nobody has seen the strategic business plan. Can the Minister tell the House whether it will be published, when it will be published and what opportunity will there be for people to comment on it? If there are confidential matters in it, as I dare say there might be, will there be an independent review? Can the Minister tell the House whether the consumer council will be able to conduct an independent review of it? That would build confidence. At the moment, we do not know what the strategic business plan is. There is also a governance letter that nobody has seen.
	These matters are crucial to whether the operation will succeed. I understand that the target is for the water undertaking to be commercially viable by 2010. That is very ambitious because everything the Minister said about the poor state of the water undertaking in Northern Ireland is absolutely true, and infraction proceedings are lurking in the background. Indeed, I recollect that a letter from the European Commission came out in the legal proceedings and that it stated that the present legislation in Northern Ireland on water is not compliant with European directives. I think that this legislation is also not compliant. I understand that the Commission and the Government are corresponding on this matter, and that it is not concluded. That also raises considerable concern.

Lord Trimble: My Lords, I thank the noble Lord for giving us that information. On regulation generally, some of what the Minister has said about the powers of the regulator give a little comfort. There is still real concern about the regulation. Again, I would like the Minister to comment on that in his winding-up speech.
	My understanding is that the regulator's powers are derived solely from the licence, which the Government have issued for consultation, and there is no power in the legislation. For a regulator to be genuinely independent there must be some statutory basis for his activity rather than being dependent on a licence issued by the department, which can be changed by that department without the same formalities as would apply in other matters.
	The noble Lord made much reference to the affordability tariff. It is good to see it there. He said that it was being funded by the Government, which is nice to see, but it is only funded up to 2010. He said that he was sure that after 2010 the Assembly would want to continue to do that. If the Assembly is there, perhaps it will, perhaps it will not; perhaps it will have the finances to do so, perhaps it will not. The noble Lord is clearly indicating that if he and his colleagues have anything to do with it, the affordability tariff will not continue after 2010.
	My amendment calls for this matter to be deferred to the Assembly. I do not accept that that would involve a two-year delay. It would involve the Assembly having to make some decisions and address some of the issues that I mentioned. At least it would ensure that the community in Northern Ireland discovered what were the financial plans, the strategic business plan, the governance letter and so on, and that decisions were taken. It would be very good for the Assembly to have quickly to address this very difficult issue because it will not find its feet and develop properly unless it does.
	I should parenthetically point out that the reference in my amendment to the Programme for Government Committee of the Assembly sounds curious but it is in substance the shadow Executive. The committee was reconstituted in November, precisely as the Executive would have been: containing only those parties that would be in an Executive, according to the number of ministerial departments that each would hold. We had a briefing by the Secretary of State, Peter Hain, here a few weeks ago. He accepted that the Programme for Government Committee was the shadow Executive—so we have reached the point in Northern Ireland where there is a shadow Executive considering policy matters. The committee wrote again last Monday, I think, to the Secretary of State, asking for the matter to be deferred to it. We should have regard to that request.
	By way of conclusion, I want to emphasise one further matter. Within the financial structures for the new undertaking there is provision for a dividend to be paid to the Treasury from the Water Service in Northern Ireland. It is set at 5.8 per cent. In England the equivalent figure is 5.1 per cent and in Scotland it is 4.1 per cent. I am sorry that the noble Lord, Lord Barnett, is not here because I would be delighted to point out to him that he and his formula are not to blame for that. Those are decisions taken entirely by the Treasury, and we can only speculate why it is so generous to Scotland. I would not like to speculate on the reason for that. I will not take Scotland as a comparator for these matters, but quite seriously—I want to press the Minister strongly on this—there should be parity between the return charge to England and that to Northern Ireland.
	The Minister made many comparisons between England and Northern Ireland. Consequently, he ought to accept this comparison. That would go a long way towards easing the difficult adjustment that there will be for people in Northern Ireland in having to pay significantly more than they have done in the past. They will have to pay more, and that will notbe popular, but it would help the Government enormously in gaining popular acceptance if they could say that they were treating people in Northern Ireland in just the same way as people in England in terms of the rate of return to the Treasury. The current provision is most unfair and I want the Minister to dwell on that—ideally, to do more than dwell on it. I beg to move.
	Moved, as an amendment to the above Motion, to leave out all the words after "that" and insert "this House, having regard to the declaration of the High Court of Justice in Northern Ireland that the draft order has not been subject to full consultation, and the repeated request of the Committee on the Programme for Government of the Northern Ireland Assembly that the legislation should be deferred, declines to approve the Water and Sewerage Services (Northern Ireland) Order 2006".

Lord Glentoran: My Lords, I thank the noble Lord, Lord Rooker, for moving the Motion so succinctly. Perhaps I should also thank the noble Lord, Lord Trimble, for making his case so elegantly and clearly. Her Majesty's Government have put us in a pretty intolerable situation. They have brought legislation before your Lordships' House which, in anyone's language, is a significant and sizeable Bill but, because it happens to be Northern Ireland legislation, has to be treated as a statutory instrument.
	The Government have made the situation more complicated because the order is very controversial, as the noble Lord, Lord Rooker, said. To complicate it even more, the Secretary of State has said that he will call a general election in Northern Ireland—on30 January, I think. Although it may not be very significant, the Conservative Party has a region in Northern Ireland which will be putting forward candidates for seats in the Assembly. That makes it even more ridiculous because those in my party—I think, in all parties, as the noble Lord, Lord Trimble, said—accept the need for charging for water and sewerage in Northern Ireland. No one has denied that water rates and the whole water and sewerage service infrastructure in Northern Ireland need serious attention. We still boast the worst-polluted beaches in certain parts of Northern Ireland, thanks to sewerage breakdown and failure.
	Her Majesty's Government, in their wisdom, have prevented us doing what Oppositions ought to doin your Lordships' House: take a government Billand attempt to improve it, amend it and shape it—sometimes, if I can be so I unkind, to bring it from cuckoo land to reality and make it of practical use. That is our job in this place. This time, because it concerns Northern Ireland, we cannot do that. All we can do is defeat the order and tell the Government to go away. In so doing, we will defeat something that we believe is necessary. I find that appalling.
	However, to compound the matter, the Government have a very reasonable way out: they believe, and I would like to believe, that we will have devolved government in Northern Ireland in three and a half months. They already started this process three and a half years ago, as the noble Lord, Lord Trimble, said. They know what they are on about. The history is already there and the plans are probably already there somewhere, covered in dust. It just seems unreal to me that we should be put into this ridiculous position of having to vote down an order that we want to be passed because we cannot amend it.
	Having said all that, I believe that the Government have moved quite a long way towards helping us, thanks to the meetings that my colleagues and I have been able to have with the Minister and his officials. The Minister's clarity when presenting the order and the things that he covered reinforced my thoughts along that line. Had I wanted to amend the Bill as opposed to giving a straight yes or no, the first thing that I would have said, wearing my businessman's hat and my Northern Ireland inhabitant's hat, was that I was not happy with how the order was going to proceed—if I am repeating things that the noble Lord, Lord Trimble, said, it is probably because we have been meeting the same people, reading the same briefs and drawing more or less the same conclusions. There was not enough clarification, even though there was a judicial review which helped to provide some. It was quite clear that all sorts of things were going on that made people suspicious. We are suspicious of how much money will go directly to the Treasury. We all know that the Treasury's hands are ready to grab anything that might be coming; as we have heard, it very often pushes government departments to create more wealth for it. We therefore wanted some assurance about how the whole process will work financially.
	I, for one, attempted to run a sizeable business in Northern Ireland in the 1970s, 1980s and 1990s, but suffered by paying the highest price for energy in the whole of Europe, thanks to my own party's incompetence. I have said that before quite loudly to the person concerned. I am delighted to hear that the Minister has committed the Government to not making that mistake again and to looking to the future. However, much boils down to the debate that we have had so far on what powers the regulator will have, when those powers will commence and how clear and visible the business process of the GoCo—government-owned company—will be. I hate those acronyms.
	I want to ask one or two questions similar to those of the noble Lord, Lord Trimble. First, on regulation, I received a letter with annexes from the Department for Regional Development, for which I thank the Minister and his officials. Will the Minister be good enough to place annexe A of the covering letter to me, dated 8 December, from Mr John Mills, acting director of the policy and legislation division, in the Library, because there is a lot of detail in it and, for those who are interested, it clarifies quite a number of issues about which I was concerned?
	Following on from that, I will repeat a few questions that the noble Lord, Lord Trimble, repeated. Will the draft strategic business plan and its underlying assumptions be made available for public scrutiny before the Minister signs it off? I have an addendum to that question: I accept that any business plan will have business confidentiality clauses, which I would not expect to be shown. Secondly, how much money will be collected from domestic consumers and how much of the total dividend will go back to the Treasury from Northern Ireland each year from 2007 to 2010? Thirdly—this may be asking a lot—will the government company have broken even by 2010, when it becomes self financing?
	Finally, I want to repeat another point made by the noble Lord, Lord Trimble. Why should poor, little Northern Ireland have to pay 5.8 per cent interest against 5.1 per cent in England and 4.1 per cent in Scotland? That is totally unjust and I shall be very interested to hear whether the Treasury has come up with a wonderful ruse on why interest rates in Northern Ireland are so much higher than anywhere else. Having said that, I await the Minister's speech on where the Government are going before I decide whether to support the order.

Baroness O'Cathain: My Lords, will the Minister explain a couple of points? I acknowledge that he is one of the most deeply concerned in this House about climate change and its impact on sustainability. Why, therefore, when he uses the words "fair contribution" with regard to pricing and to ensuring that pensioner households would be the first group to be offeredthe choice of a meter, is he tying the Assembly's hands behind its back so that it will not be able to introduce meters generally in Northern Ireland? Thatwould solve the problems brought about by the sustainability argument à propos of climate change. It is such a backward step when we all know that in England, Wales and Scotland, if we were starting from scratch, we would make sure that every household had a meter. We now have a great opportunity to do so. At the same time it will look affordable and fair—the very words used were "fair contribution". However, how can the Minister square the fair contribution argument with the statement,
	"all households will pay a direct charge for water and sewerage services received, consisting of a standing charge and a variable element based on the discrete capital value of each property",
	And not based on whatever drop of water they consume?
	I am really concerned about this. The order has been brought forward by people who have a much shorter-term vision and strategy for the country as a whole than us here in the House of Lords. They are obviously worried about the next general election, but we can think about the elements the Minister is so concerned about: the impact of climate change, and sustainability. I do not want to put him on the spot, but why oh why are they not taking the opportunity to allow meters to be introduced generally?

Lord Browne of Belmont: My Lords, it is clear that the water and sewerage infrastructure in Northern Ireland needs to be brought up to modern-day health standards. We all agree that it has to be paid for, but at a time when direct Ministers are trying to restore democratic institutions in Northern Ireland, it is regrettable that they continue to implement policies that contradict entirely the agreement of the people, their political representatives, the trade unions, the business community and other interested bodies.
	The Minister referred to the judicial review held in Belfast High Court on 22 November. The General Consumer Council for Northern Ireland had a victory because it was agreed that a full consultation process had not taken place. I agree with the council's concern about the lack of consumer protection contained in the order comparable to the gas and electricity industries. That is regrettable as well. The order places the water service as a Government-owned company—GoCo—and while the Government will remain the overall shareholder, the option is available for the company to be passed into private hands. That led to a £1 billion loss to consumers when the electricity sector in Northern Ireland was privatised.
	It is a false proposition to suggest that the people of Northern Ireland do not pay and have never paid for water through their rates. Despite the disproportionate costs Northern Ireland consumers face for other amenities and services compared with the rest of the United Kingdom, water was first an identifiable component part of householders' rates before being subsumed into an overall rate, which is still the case.
	In addition to the large increases in the regional rate that householders will face next year—which, prior to the St Andrews agreement, was uncapped—the additional expenditure to meet water costs will place an inordinate burden, whatever the additional charge upon householders who already suffer hardship and poverty. Indeed, the Government's estimates predict the highest rate for water rising from around £260 to £800 by 2009-10, with the average charge in the region of £334.
	Although the actual consumption of water is a minimal element of the overall water service, the option of metering will initially be available only to new householders and pensioners. That is a wholly inequitable basis on which to administer a water charging system. If there is merit in the provision of metering, it should be open to all at the initial stages.
	It is about time that such decisions were deferred so that democratically accountable representatives in Northern Ireland can take them once devolution is restored.

Lord Morrow: My Lords, I apologise for my late arrival in the House—I was in attendance at the Northern Ireland Assembly. The noble Lord, Lord Trimble, said that there was an Executive-in-waiting in the Northern Ireland Assembly; as one who is a Member of that Assembly, I did not recognise that when I was there today. However, I find myself generally in agreement with many of the things he said on this issue.
	The order is a classic example of the Government doing the wrong thing at the wrong time. Any justification for them proceeding in the way they intend surely must have been removed as a result of the declaration by the High Court in Belfast last week. Apart from the substance of the order, we believe that there are several underlying reasons why the Government should not be proceeding in this manner. First, the Government lack a mandate in Northern Ireland for their proposals. It is clear from the positions taken by all the political parties and others in Northern Ireland that there is widespread opposition to the Government's proposals. Indeed, my own party, the DUP, won a mandate in the 2005 Westminster election on the basis of a manifesto commitment to oppose the Government's proposals for water charging. There is therefore no support in Northern Ireland for the Government's plans.
	Secondly, the order is not subject to sufficient parliamentary scrutiny. This is one of the most important issues affecting Northern Ireland to come before Parliament this Session. However, due to the process by which Northern Ireland legislation is dealt with at Westminster, the order will receive scant attention in Committee with no possibility of amendment. For a Bill with 308 clauses and 13 schedules, that is a constitutionally outrageous position. The pre-legislative consultation process does not make up for this inadequacy.
	Thirdly, decisions should be left until the return of devolution. Although there are significant accounting issues in relation to the question of whether water services in Northern Ireland should be self-financing, the existence of, or detail of, water charges should ultimately be a matter for the people of Northern Ireland to determine. There are clearly implications for spending in Northern Ireland of not proceeding with water charges, but these choices should not be made by people here.
	In addition to the general considerations set out above, there are a number of specific objections to the Government's proposals. First, government proposals do not take account of the contribution already made to the provision of water services. Although not specifically related to the detail of the order, no account has been taken of the fact that a contribution is already being made to the cost of water services through the regional rate. This proposal will inevitably increase the average water charge and will make the introduction of water charges more unacceptable than would otherwise have been the case. It is one thing to pay for water—it is quite another to pay for it twice.
	Secondly, the Government were disingenuous in relation to the justification for water charges. They sought to justify water charges on the basis that they were addressing the water framework directive, yet they then devised a system that did not even meet the requirements of the directive.
	Thirdly, the Government have used water charges as a mechanism to increase the level of local taxation in Northern Ireland. In reality, water charges have been used as a cover to massively increase the level of taxation in Northern Ireland. At the same time, there has been a significant increase in the regional rate and a new rating valuation system. While there may be justifications for a separate charging mechanism for water services, that does not necessarily mean that there need to be significant increases in the overall tax burden.
	Fourthly, the Government have reneged on proposals in relation to the reinvestment and reform initiative. As originally proposed, water charges were to be regarded as qualifying revenue when considering the capacity to avail of the borrowing power under the RRI. Since then, however, the Government have changed the rules and, as a result, there is no advantage, in borrowing terms, of water charges. When compared with the overall Northern Ireland budget, water charges make up a very small percentage of local spending. In essence, a significant additional burden on the householder of water charges makes very little difference to what can be done in spending terms.
	My party continues to be opposed to the privatisation of the water service in Northern Ireland and believes that any future change in the status of the water service should come about only in circumstances in which there was widespread support in Northern Ireland.
	It is totally unreasonable to expect householders to pay for roads drainage. This cost should be attributed elsewhere.
	The option of water-metering, with appropriate consideration being given to the infrastructure costs, should be available for all Northern Ireland consumers. We reject universal metering as being too costly and no metering as being too unfair. The capital value of a person's home is too inaccurate as a proxy for ability to pay to be the only reliable method for assessing water charges. The argument that only the better off would opt for metering could be negated by setting the fixed-cost element at an appropriate level. Ultimately, the wider the availability of water-metering, the greater is the potential for encouraging conservation of water. While we welcome the option of water-metering being made available to certain groups under the Government's proposals, it should not be limited to them. It is not clear that vulnerable groups will benefit from metering. Therefore, the metering alternative, as presently proposed, may prove to be an empty gesture.
	Northern Ireland has faced many greater challenges than other parts of the United Kingdom during the past three decades. I do not have to go into what those challenges have been. However, Northern Ireland is also less able to pay water charges than other parts of the United Kingdom. In these circumstances, the average water charge should be no higher than that in England and Wales, with a maximum fixed at this level. This would act as an appropriate balance between requiring Northern Ireland consumers to make a greater contribution towards the cost of water and not punishing Northern Ireland householders for a lack of government investment.
	The Government's proposals to deal with vulnerable groups were one of the more welcome aspects of the overall package. However, such protections should continue to exist into the future and should not be limited to a particular time period. We oppose this legislation and urge your Lordships' House to do likewise.

Lord Rooker: My Lords, I am very grateful for the contributions. At the outset I should say that many good and valid points were made. However, we are now in December 2006 and we have a budget plan and a start-up date for April 2007. I do not say that with the intention of ramming the measure through the House; I am in no position to ram it through the House. How can I be—the Government have only30 per cent of the votes in this place? But that is not the point. We have heard no viable alternatives but we have heard many calls for delay. However, that is not an answer to the problem with which the Government are faced in December 2006.
	I do not disagree with some of the points that were made. I shall try to answer as many as I can although I shall do so briefly given time pressures. However, I would rather be accused of taking a bit longer than of not answering questions when I have an answer, for example on metering. It is unsatisfactory. People ought to have a better choice. There are practical reasons why that is not the case. The aim is to have metering. It is not as if there is not a long-term aim and a plan, but it cannot be done that quickly.
	I fully respect where the noble Lord, Lord Morrow, is coming from as a representative of the majority party in Northern Ireland. However, he did not hear all the good points and statistics that I gave in my opening speech. I shall not repeat them as that would not be fair. A legitimate question to ask is whether it is the policy to repeal the legislation. From my point of view that is a legitimate question because, as I said, once the Assembly is back and an Executive are in place they will own the issue. They will own the policy and the legislation. They can do with it as they wish and make the decisions according to their judgment. I fully admit that the present situation is unsatisfactory.
	I respond to an issue on which I have a standard line, which is now buried under all my other notes. I take the point of what was said, particularly by the noble Lord, Lord Smith of Clifton. I repeat thatthe present procedure of Orders in Council is unsatisfactory. It is not democratic in the sense that we generally understand the word. We have given a clear commitment from which I do not resile. There is no plan to come forward with a sheaf of other Orders in Council. I do not say that there will not be any but there is no plan to load Orders in Council between now and the end of March just because we have given a commitment that if the Assembly is not back we will change the process. That commitment remains. We hope that the parties will be back. They can then take up their responsibilities and take the decisions. If that is not the case and they do not agree to return, we are committed to introduce practical measures quickly to reform the process. Those will be discussed and agreed through the usual channels. There is no question of our having a veto on this. We are seeking to implement the St Andrews agreement. We want to concentrate on the date of 26 March in that regard.
	I cannot answer the points in the order in which they were raised. However, I say to the noble Lord, Lord Trimble, and others who raised this point that I have a timetable which illustrates the implications of possible primary legislation. If the Assembly abolished the measure or the order is not carried, in April 2007 the Assembly would certainly have to scope the policy. In May 2007 the policy development would have to be reviewed. There is no question about that. Policy consultation clearance would take place in June 2007. In September to November 2007 there would be policy consultation, finalisation of policy and policy clearance through the Executive. Final drafting would take place not before January 2008. Then you would have to get clearance for the legislation. Legislation consultation would take us up to May 2008. Legislation finalisation—the way the process works—would take us up to July 2008. Bill clearance would be in August 2008. There would be the introduction and second stage of the legislation in September 2008; the Committee stagein December 2008; in January to March 2009 there would be further consideration and Royal Assent, and April 2009 would be the operative date. That is two years. I can go through those dates; none of those are unreasonable in a considered, mature process of legislation, which is what a devolved Assembly would want.
	I covered some of the points that the noble Lord, Lord Morrow, made in my opening speech. There is a leaflet, Water Charges Made Clear, being put through every door in Northern Ireland, and I bet someone will stand up and say that they have not got one. There is a paragraph on page 5 that says:
	"Once charges are fully introduced in 2009/2010, the lowest charge will be around £90 a year, the highest charge will be around £800 a year and the average charge will be £334".
	That is virtually in line with what we estimate will be the proposed averaged charge in England, Wales and Scotland at that time. As I said earlier, it is around £294 or £295 at present, and we have no plan tohave charges in Northern Ireland higher and disproportionately out of kilter with Great Britain. That is in the document that we have published. Page 6 covers the issue of property value, from £20,000 up to £450,000 plus. In the first year, anyone living in the biggest, most expensive house in Northern Ireland, with a massive income, will pay £257. That is £5 a week in the first year; that is what they will pay. I have given the figures for the reduced tariff; I will not go over that again. The full amount without phasing—the Government will subsidise this—will be £770 for a £450,000 dwelling. The average charge will be £334. It is not massive. After that, there is bound to be a review of the legislation.
	I do not accept the issue of the double charge. As everyone knows, I had not set foot on the island of Ireland until May 2005. The money to run the water would take, from memory, about 80 per cent of the current rates bill. That would not leave any money for anything else. The water charges both for getting clean, wholesome water that is safe to drink and for disposing of our waste water are not paid for by the rates. That is paid for out of general taxation. That is the issue, whatever might have happened in the past.
	Providing meters at the outset could not be delivered by April 2007. There is a practical issue here; we are talking about 650,000 dwellings. The capacity is not there to install the meters by then. I was asked about the disruption. As I think I told the House, installing my meter in London, from the knock on the door to signing the paper to installation to driving away, took less than 10 minutes. It is not always possible to do that; it depends on what is fitted in the pavement and how easy it is to put in the meter. That is what happened for me. I freely admit that I am over 65, so I am not getting something that they would not get in Northern Ireland. I do not go for the disruption argument, but it would be an immense job. The cost would be in excess of £100 million. That would be the capital cost to the Water Service of the metering if we went for it. It is an impractical suggestion to do it straight away. In England and Wales, one company is doing it and it would take up to 10 years. It is a large process. Therefore, we had to set a priority, and the priority was new dwellings—that is fairly easy to put on and it has been the case in England for some years now—and pensioners. Not all pensioners are poor, but you have to make a category that is sensible and easy to understand. That is why we did it that way.
	The noble Lord, Lord Browne, criticised the legislation on the grounds of consumer representation. The order has been developed on the well-precedented and established template provided by the Water Industry Act 1991. I suspect that I definitely voted against that Act in the other place, but we have come a long way since then. It has been amended by the 2002 Act, and it follows the approach of the Utilities Act 2000. Consideration was given to the Energy (Northern Ireland) Order 2003. This order reflects the best practice in up-to-date utility regulation, enshrining the protection of consumer interests and securing the extension of the consumer council's powers to include water and sewerage services. So, we cannot accept that consumers are not protected and that the consumer council does not have a bigger involvement—it does. Consumers are no less protected than in England and Wales, and that is the key point.
	I think that I have met the point made by the noble Baroness, Lady O'Cathain, on climate change. There is an issue and she is right to ask the question. I am uncomfortable regarding the central part of the answer but I am comfortable with regard to the practicalities of the timescale. One would have wished that metering had been carried out earlier and that there had been a better plan for it. That did not happen, but it is the future plan. We will all be metered in the not too distant future and we will pay for what we use.
	I was asked how much money we were collecting from domestic customers in 2007-08 compared with 2008-09. In round terms, the contribution will be:in 2007-08, some £60 million; the following year about £130 million; and in 2009-10 it will be about £200 million.

Lord Rooker: My Lords, I think that part of the deal we did was that none of that goes back to the Treasury. However, I do not see any nods of approval there—which is very helpful.
	As for the water company's self-financing and breaking even, we have to fund the capital charges. Some £1 billion of capital is being invested in the water industry by the general taxpayer—by people from England, Scotland and Wales as well as Northern Ireland. Massive amounts are going into the infrastructure well before any of these provisions come into effect. I have described chapter and verse the length of the new sewers and pipelines and the projects that are under way. Some £448 million of work is taking place now, while 26 projects have been completed in the past three years, over which time there has been some £629 million of investment.
	There is no secret plan for privatisation. I take the point made by the noble Lord, Lord Trimble. It istrue that the Secretary of State has agreed with the Chief Secretary to the Treasury, who conducted the negotiations on how the GoCo would be set up, its initial dowry, the size of its capital and the rate of return, all of which are key figures. The order before us is the result of that. The email to which the noble Lord, Lord Trimble, referred, commented on the 2008 review. It is wrong to suggest that any decision has been made. That is not to say that a decision could not be made in future. On the issue of the rate of return, although I cannot conduct negotiations at the Dispatch Box, there is a good case for having another look at that again within government. It is part of the package. I am not sure of all the details but part of that return affected the amount of capital provided, and therefore a balance will have to be struck in the charges that have to be put on the customers. I am happy to give a commitment that we will go back and look at that.
	The answers to specific questions raised on behalf of the consumer council have been put in front of me at the last minute. I was asked whether the strategic business plan would be available for public scrutiny.It will not be published as it will be an internal, commercially sensitive document, and noble Lords have accepted that. The Water Service will publish as full a summary as possible of the plan when it is finalised before April 2007. The maximum amount of information that does not affect commercial sensitivities will be put into the public domain before the new charges begin.
	I was also asked how much money would be collected from domestic customers. I have answered that. As for how much of total dividends will go back to the Treasury in each year from 2007 to 2010, there are constraints on local Ministers as a direct consequence of the UK public expenditure system being a reserved matter. The money to run Northern Ireland—the £5 billion transfer to fund it—comes from somewhere. The Treasury is responsible for fixing those figures. There is a budget of £9 billion for Northern Ireland. The Treasury is involved there and it is a reserved matter. It has policy responsibility. That is absolutely clear and I do not believe that anyone could sensibly argue with it.
	The system requires that holding assets or investments has a cost—that is what the water company will be doing. It should be transparent and reflected in the budgets. The Treasury has determined the cost of these investments in the GoCo, which should be at a rate of 5.8 per cent of the value of the investment, so the amount will be a charge on the public expenditure in Northern Ireland every year. That is the starting point from which Northern Ireland Ministers have virtually no discretion. That does not mean it cannot be discussed within government. As that cost arises, I presume, for water and sewage, it is reasonable that those who receive the service—both domestic and non-domestic—should pay it. I do not think anybody should mention non-domestic cases today, so I will not answer any questions on it, but they are equally involved in this.
	Any and all amounts paid by way of dividends are available for investment in the public service in Northern Ireland. The money will be retained in Northern Ireland—that is what the investment isall about. We are prepared to raise again within government the figure of 5.8 per cent compared with 5.1 per cent. There is probably a really good accountancy Treasury reason for that, but it is a reasonable question to be asked by the average person on the street in Northern Ireland, who is being asked to pay for something that they thought they already paid for but did not—it is an extra charge over which they pay now. It brings them somewhere near the charges in England, Scotland and Wales, because they are, massively, double the amount of household charges. Therefore, I think it behoves us to go back into government and at least raise the question again.
	The noble Lord, Lord Glentoran, asked about the regulator's powers. Certainly the annexe—indeed, the whole letter that was issued to him on Friday, I hope, and, if not, at the weekend—will be put in the Library, because it sets out clearly the powers ofthe regulator and where the authority is. In respect of the question from, I think, the noble Lord, Lord Trimble, the regulator's powers are enshrined in the legislation; they do not derive from the licence. Itis very important to note that. The details of the GoCo's appointments are in the licence, but the powers are enshrined in legislation, so that cannot be mucked about with in the licence—not that we intend to do so.
	Another important point, because the regulator has work to do, is that the order makes provisions for the enforcement of the GoCo's duties and obligations. The department will provide the authority with a general authorisation to exercise its full enforcement of the undertaker's statutory duties from 1 April 2007, or as soon as practicable. I am not sure what day of the week 1 April is, but the regulator will start work straightaway, from day one or as soon as is practicable, with those powers.
	It is true that the draft licence was issued for consultation on 4 December. We believe that a lot of time has been spent on it—seven months, through an engagement with key stakeholders. We believe it builds on the best regulatory practice and provides the means by which the regulator can ensure that Northern Ireland Water is focused on efficiency and consumer service. It protects the interest of customers through robust regulatory scrutiny while setting the appropriate framework. Importantly, the draft licence would improve on the licences in place in England and Wales by, for example, requiring Northern Ireland Water to submit an estate management plan to ensure high visibility of any plans to sell surplus land. In an early part of my speech I described the rules for disposing of land or not. Some land may have been acquired by compulsory purchase. Land may be acquired in the future, and one has to look at the position, but certainly the regulators have got to have a key power in that.
	The regulator's powers are important and can be dealt with only at some length, but are nevertheless dealt with in the annexe in the letter that I sent to the noble Lord, Lord Glentoran. In respect of enforcement, a wide range of powers go to the regulator, or by the authority on authorisation by the government department. But from 1 April, the department will issue a general authorisation to the regulator to carry out enforcement where there is a choice between it and the department. That annexe, which will be placed in the Library, sets out where the power is clearly for the authority, or where it is the department or the authority. We have said that, where there is a choice between the regulator and the department as to who does what, the regulator will exercise the powers. I cannot be clearer than that. We have protected the poorest people in Northern Ireland.
	I genuinely apologise that this measure is in the form of an Order in Council, because it has not been subject to the scrutiny that a proper Bill would receive in this or the other place. Although I do not want to upset the noble Lords sitting behind me to my right, I repeat that, if the Assembly had reconvened lastweek or the week before, the order would have been its responsibility. In fact, it is the Assembly's responsibility—it should not be ours. We have repeatedly made it clear that, while the politicians of Northern Ireland, of whatever party and for whatever reason, refuse to take up their responsibilities, we will not stop the reform programme for the people of Northern Ireland, in whatever area—be it local government or rates reform.
	Local government in Northern Ireland benefits from this order as extra money can flow to the public services. If the measure is not carried, it puts at risk the £200 million a year borrowing power secured previously by the respected former First Minister. With the order, more money can flow into public services in Northern Ireland and, above all, Northern Ireland can get a water service which is at least equal to that in England and Wales. As I said, at the moment the quality and parameters of the service are like those in England and Wales 16 years ago. It is time to move on. The costs are not onerous either for the poorest or the wealthiest in Northern Ireland. I simply ask for support for the order.

Baroness Scotland of Asthal: rose to move, That the draft order laid before the House on 7 November be approved [First Report from the Statutory Instruments Committee].

Baroness Scotland of Asthal: My Lords, we are concerned here with the further secondary legislation required to amend the Extradition Act 2003 (Designation of Part 1 Territories) Order 2003 and the Extradition Act 2003 (Designation of Part 2 Territories) Order 2003. This is to reflect the separation of Serbia and Montenegro into two independent states and the accession of Bosnia-Herzegovina to the European Convention on Extradition, and to allow Romania and Bulgaria to operate the European arrest warrant procedure when they accede to the European Union on 1 January 2007. These amendments are necessary to ensure that the United Kingdom is able to comply with its obligations under the relevant international extradition agreements.
	A referendum was held in Montenegro on 21 May 2006, and its citizens voted to separate from Serbia. Montenegro subsequently declared independence in June, and Montenegro and Serbia are now two separate countries. The amendment simply reflects the new political status of those two countries, and extradition will continue to take place under the European Convention on Extradition, to which they are both a party.
	Bosnia-Herzegovina is now also a party to the European Convention on Extradition (ECE), and an amendment is needed to reflect the changes required to update our extradition arrangements with that country, which currently fall under an old bilateral extradition treaty with Yugoslavia. That treaty required prima facie evidence in support of an extradition request, which is not a requirement under the European Convention on Extradition. This instrument therefore amends the designation of Bosnia-Herzegovina to make us comply with the terms of the ECE. This will mean that Bosnia-Herzegovina will no longer be required to submit prima facie evidence in support of its extradition requests in the same way as the UK is no longer required to provide prima facie evidence in any extradition requests made to Bosnia-Herzegovina.
	Your Lordships will be aware that on 1 January 2007 Romania and Bulgaria will accede to the European Union. That means that, from that date onwards, EU extraditions with those states will cease to take place under the European Convention on Extradition and will fall under the European arrest warrant (EAW) procedure instead. It is therefore necessary to redesignate them as Part 1 territories to ensure that we comply with our obligations under the framework decision on the EAW.
	The accession of Romania and Bulgaria to the EU was not a decision taken lightly. The European Council and the Commission monitored both countries very carefully in order to be sure that they were ready to accede to the EU. Robust benchmarks for progress in justice and home affairs have been set for both countries. The benchmarks cover continued reform of the judiciary in both countries, including measures to enhance efficiency, transparency and accountability. The Commission will monitor them closely and will report to the Council and European Parliament on progress against the benchmarks by June 2007. In the event that they are not addressed adequately, the Commission can trigger the justice and home affairs safeguard, which means that it can suspend, on a temporary basis, specific rights of Bulgaria and Romania under EU laws and standards; for example, that could enable current member states to refuse automatic recognition and enforcement of certain civil and criminal judgments and arrest warrants in Bulgaria or Romania. That could include the European arrest warrant. The monitoring mechanism is a robust and unprecedented approach, which will also act as a powerful lever for further reform.
	Failure to redesignate Bulgaria and Romania would place the United Kingdom directly in breach of our international obligations under the framework decision on the European arrest warrant. We have had extradition relations with Bulgaria and Romania since they became parties to the European Convention on Extradition in September 1995 and December 1997 respectively. Since that time they have not had to provide prima facie evidence in support of extradition requests made to the United Kingdom. Indeed, although the number of extradition requests between our two countries has been small, the arrangement is working well.
	In any event, we are satisfied that sufficient safeguards are in place for those who may find themselves the subject of an European arrest warrant request from Bulgaria and Romania, as indeed there would be for any request received from one of our extradition partners. The Extradition Act 2003 contains a number of very effective safeguards. For example, the subject of a European arrest warrant cannot be surrendered to another member state if it appears that he or she is being prosecuted or punished on account of race, religion, nationality, gender, sexual orientation or political opinions. Extradition would also be barred if the judge decided that it would not be compatible with human rights. No UK national, nor indeed a national of any country, will be extradited to another country if it is believed that to do so would be a flagrant breach of the human rights of the person sought. In the event that a UK national was extradited to another country, they would be entitled to consular support from the UK's embassy or high commission in the country concerned.
	Romania and Bulgaria are also parties to the European Convention on Human Rights, which obliges them to ensure that any subsequent domestic criminal trial does not breach a person's human rights under that convention.
	I hope that, with that explanation, I can invite the House to agree to this order. I beg to move.
	Moved, That the draft order laid before the House on 7 November be approved [First Report from the Statutory Instruments Committee].—(Baroness Scotland of Asthal.)

Lord Kingsland: My Lords, I would like to ask the Minister whether these states have given the benefit of the forum exemption to their own citizens, either with respect to Article 7(1) of the European Convention on Extradition, in the case of Montenegro and Bosnia, or to Article 4(7)(a) in the Council framework decision of 13 June 2002 on the European arrest warrant, in the case of Romania and Bulgaria. As your Lordships know, we have not done so in our own legislation.
	I raise this issue, first, in the context of reciprocity. That was, of course, the central question in the great debate over the United States extradition treaty. We could not understand why the Government negotiators had not sought, let alone achieved, what Ireland and France had succeeded in achieving effortlessly; that is to say, the insertion of forum protection in the treaty to offset the continued requirement of the United States that we show probable cause.
	The noble Baroness should not be lulled into thinking that, just because we decided not to vote to send the matter back to another place for a third time, we found the Government's arguments in any way convincing. We, of course, have the right to do so, just as the Parliament Acts of 1911 and 1949 can, in response, be invoked by the Government. These are constitutional powers given to us by the elected House.
	This right, I entirely accept, should be used extremely sparingly and only in appropriate circumstances. In the American case, the view was taken that, despite the breathtaking irresponsibility of the Government in the way they conducted the negotiations, we were faced with a concluded treaty with both states on the point of exchanging instruments of ratification.
	Two other considerations influenced us. Our amendments were added to a really substantial Bill which otherwise had nothing whatsoever to do with extradition. If the Government had invoked the Parliament Act, the whole Bill—a Bill which contained many good things that needed speedily to reach the statute book—would have been delayed. Moreover, it was plain that the revolt by the Government's Back-Benchers against ratification of the treaty was substantially at an end. It may be, of course, that if we are one day to become an elected House, in similar circumstances a different approach would be adopted.
	Today I am faced with a constraining convention of a different sort: that the House—apart from the most exceptional circumstances, one of which occurred this afternoon—does not vote against secondary legislation, although it cannot amend it. I recognise that. However, the Government have more room for manoeuvre than they claimed to have in the American case. There is no reason whatsoever why they cannot amend the Extradition Act 2003 to incorporate the terms of Articles 7(1) and 4(7)(a). Both the European Convention on Extradition and the framework decision on the European arrest warrant permit us to do that.
	Quite apart from whether reciprocity is a factor in this case, there is another reason why we should amend the 2003 Act in the way that I suggest. Concerns about the judicial system in Romania, freely acknowledged by the Government in another place—and in your Lordships' House today—give particular force to the argument that I am about to advance. As the noble Baroness is well aware, a recent Court of Appeal decision concluded that the terms of extradition treaties override the Human Rights Act, so the incorporation of the Human Rights Act inthe Extradition Act 2003 is of limited protection to the individual.
	That is all the more reason for the courts to have the right to assess the appropriateness of forum in the light of all the locational and evidential considerations of an alleged extraditable offence.

Lord McKenzie of Luton: My Lords, I beg to move that this Bill be now read a second time.
	I start by expressing my gratitude for the close co-operation that we have received in expediting the Bill. Expeditious proceedings demand a good reason and some unusual circumstances. That is the case today. The Bill fulfils a commitment given to the House of Commons by the Economic Secretary to the Treasury on 13 September to enhance the powers of the Financial Services Authority—the FSA—to veto changes to the rules of UK-recognised investment exchanges and clearing houses where they are deemed to be disproportionate. That statement was prompted by concerns over the possible regulatory implications of any possible takeover bid for the London Stock Exchange. At the time, a NASDAQ bid for the LSE was still only a possibility. Since then, the US stock market NASDAQ has announced an offer for the LSE. So, with a bid on the table, it is important that we move quickly. With the co-operation of your Lordships, the Government's aim is to see the Bill gain Royal Assent as soon as possible, consistent with proper scrutiny of the proposals I am setting out.
	The other place considered all stages of the Bill on Tuesday, 28 November. I should like to explain the intended timetable for the Bill in this House. The normal minimum interval between First and Second Readings—two weekends—has been followed. From here on, the usual channels have agreed to shorten the normal minimum intervals. If the Bill receives a Second Reading today, it is proposed to schedule the Committee stage for Monday, 18 December. If the Bill is not amended in Committee, Report stage will be taken formally, immediately after Committee stage. Third Reading would follow on Tuesday, 19 December. If the Bill is not amended, Royal Assent will take place later on that day.
	Before turning to the Bill, I should like to set out the wider context. London is widely seen as one of only two truly global financial centres in the world. It is the location for 70 per cent of the global secondary bond market, more than 40 per cent of the derivatives market, more than 30 per cent of world foreign exchange business, more than 40 per cent of cross-border equities trading and 20 per cent of cross-border bank lending. More foreign banks operate in London than any other financial centre. It is the location for the headquarters of six of the world's 10 largest international law firms, and for 200 foreign law firms which recognise its global importance and the role of English law in so much international trade and financial services.
	Based on the City's global reach and outlook, its reputation for free, fair and open global markets and our proportionate risk-based approach to regulation, London has attracted business and listings from around the world, which is increasingly recognised abroad. An authoritative independent report, which was published in the United States on 30 November, states:
	"It is worth noting that London, for many years lacking the dominant position in worldwide capital or investment opportunities (which arguably it once held), has been able to retain its position as a leading financial center by choice, not necessity. It has done so, in the view of many, by providing the protection to investors of well-crafted, effective laws properly enforced without unnecessary cost and undue exposure to liability risk".
	The Government are determined to keep it that way.
	This year, concerns were put to the Government about the effects of a possible takeover of the London Stock Exchange by a company based outside the United Kingdom and the threat that this might pose to London's attractiveness as a place for international listing and wider business. The UK has for some years been home to several foreign-owned exchanges and has always been open to overseas investment in UK exchanges. LIFFE, ICE Futures and Virt-X are all owned by overseas companies, NYMEX Europe was established by an overseas company and EDX London is a joint venture between a UK and overseas exchange. That has in part reflected our principles-based, recognised investment exchange regime, which has been flexible enough to accommodate the significant changes in the exchange's business models in recent years, but rigorous enough to ensure that UK markets have a high reputation for probity.But NASDAQ's interest in acquiring the London Stock Exchange has led to discussions about the implications of such a change in ownership.
	The Government want to make two points absolutely clear. First, they are neutral with respect to the nationality of the ownership of the London Stock Exchange and reject the argument that they should intervene to protect that exchange, or any other UK exchange, from foreign ownership, which would fly in the face of the traditions that have underpinned the City's success. A policy of protecting national champions would damage and not bolster the interests of London and the UK. So the Government do not have and will not express any views about the merits of this proposed takeover. It is for the current owners of the shares to decide whether to accept or reject the offer. But the Government are no less determined that a change in the ownership of the LSE should not affect the existing regulatory regime under which the exchange and its members and issuers operate. We are determined to protect our domestic regulatory environment, which is founded in both UK law and EC directives, which has made the City a magnet for international business. If you operate in London, you should be regulated in London. I am pleased to say that the Government's determination in that respect is also recognised abroad. I hope I may be permitted a second quotation from the report I referred to earlier:
	"There should be no doubt that obtaining and sustaining competitive advantage in financial services by managing regulatory costs and burdens while maintaining the confidence of investors has become an explicit focus of government policy in competing market centers. In a recent statement, Ed Balls, Economic Secretary to the U.K. Treasury, said: 'Our system of principles and risk-based regulation provides our financial services with a huge competitive advantage and is regarded as the best in the world'".
	The Bill will help to preserve that system by making changes to Part 18 of the Financial Services and Markets Act 2000, which provides for the recognition of investment exchanges and clearing houses. The provisions will confer a new and specific power on the Financial Services Authority to veto rule changes proposed by UK-recognised investment exchanges and clearing houses that would have an excessive regulatory impact. By "excessive", we mean that the proposed rule would impose a regulatory burden on the user of the exchange or clearing house or the wider community that could not be justified by any regulatory benefits, or whose effect on those users or the wider community would be disproportionate to any such benefit, and would not be something already required or contemplated by UK or EC law.
	The new powers will not put the existing regulatory provisions of the recognised investment exchanges and clearing houses into question; they will apply only to future changes. They will also apply to all UK-recognised investment exchanges and clearing houses from the outset. They will not just apply after there has been a change of control. This will happen to all recognised exchanges and clearing houses, not just those that are in foreign hands. The Bill also provides for the necessary processes and safeguards.
	The exchanges and clearing houses will be required to notify the FSA of proposed changes to their rules and other regulatory provision, by which I mean any guidance, policy, practice or arrangement made by an exchange or clearing house. The FSA will have up to 30 days to decide whether to call in a proposal for further examination. If it calls in the proposal, the FSA will have to set a period in which it will consult publicly about the proposed rule change. It will then have a further 30 days after that consultation period has ended to decide whether to veto the proposed rule change.
	An exchange or clearing house will not be ableto introduce the proposed change in regulatory provision until either the initial 30-day period has expired without the FSA calling in the proposal, the FSA has confirmed that it will not be calling it in,the FSA has stated that it will not be vetoing it or the further 30-day period has expired without the FSA issuing a veto. In the event of an application for judicial review of an FSA veto decision, the Bill makes provision for the effect of the judicial review on the time limits for imposing a veto and the time when a regulatory provision may be validly made by an investment exchange or clearing house.
	In drawing up these clauses, we have been anxious to ensure that the procedures are not burdensome and disruptive for the recognised investment exchanges and clearing houses. Any unnecessary regulation would stifle innovation and impose extra costs for both the exchanges themselves and the FSA—costs that would ultimately be paid by the exchanges and clearing houses and their users—and conflict with the ultimate objective, which is to facilitate innovative developments that will help London remain a world-leading and well-regulated financial centre.
	Treasury officials consulted the exchanges and clearing houses themselves. In consultation, those bodies made clear their concerns that the procedures in the Bill, if applied in a heavy-handed way, could damage their competitive position by reducing the flexibility they have to make and change their rules. The Government are determined that this will not happen. We are committed to ensuring that the new processes will not impose an unnecessary burden on the exchanges and clearing houses or the FSA. The new power has always been intended as a backstop. It has never been intended as a day-to-day supervisory tool for the FSA.
	It is the clear view of the Government and the FSA that the vast majority of changes to regulatory provisions will not raise the kinds of concern which the new power is intended to address. Many rule changes by exchanges and clearing houses are simply routine changes. These should not be subject to the kind of scrutiny and processes which I have just outlined. The Financial Services Authority will not be involved in micromanaging the rulebooks of the exchanges and clearing houses. It will act fully and consistently within the principles-based approach to regulation which characterises the regime established under the Financial Services and Markets Act 2000. The FSA's chief executive, Mr John Tiner, wrote last month to the Economic Secretary to confirm this point, and a copy of the letter has been placed in the Library. To make this clear, and following detailed consultation with the FSA and the exchanges, the Bill gives a power to the FSA to specify in its rules the types of change to regulatory provision which need to be notified and those which do not. This approach fits well with the general scheme of the Financial Services and Markets Act. The general approach is in the Act, but the more detailed working out is left to secondary legislation—either Treasury regulations or FSA rules.
	Of course, it will take time for the FSA to plan, discuss, devise, draft rules, consult on draft rules and make the necessary rules. But in view of the need to act with some urgency, and because it will take longer for the FSA to draw up and consult on these detailed rules than the time available before Royal Assent, the Bill also gives the FSA a power to grant waivers from the notification obligation to exchanges and clearing houses for the first 12 months.
	These provisions are intended to come into force on the day after Royal Assent, so that once Parliament has decided that the new regime is to have effect, the policy intention of the Bill could not be undermined by precipitate rule changes between Royal Assent and commencement.
	I am sure that your Lordships will be pleased to hear that the FSA has already started working with the exchanges and clearing houses on the formulation of the waivers. That work is already well advanced.
	The legislation reflects two key principles—first, the principle that we should be blind to ownershipof exchanges is protected: entrenching London's reputation as a global financial centre determined to attract talent and ownership from around the world. Nothing in the Bill has any consequence for the nationality of the ownership of UK exchanges. It will make overseas ownership neither easier nor more difficult. It will not deter any potential foreign investor who wants to come to the UK.
	The second principle is that it is right for our Government to act to protect and enhance the UK's proportionate and risk-based regulatory regime. That approach—founded on principles rather than on centrally formulated detailed rules, proportionate to real problems and based on the actual risks to consumers and investors—has served the UK well. The Government are determined to safeguard it.
	I believe that the Bill will deliver that objective and do so without imposing any unnecessary regulatory burden on the exchanges and clearing houses. The Bill is legislation not to impose regulation but to avoid any risk of excessive regulation being imported into the UK. By outlawing the imposition of any rules that might endanger the proportionate and risk-based regulatory regime that underpins the City's success, I am sure that the Bill will help ensure that London continues to be a magnet for international business and new listings from around the world. I commend the Bill to your Lordships.
	Moved, That the Bill be now read a second time.—(Lord McKenzie of Luton.)

Lord MacGregor of Pulham Market: My Lords, I welcome the Bill but am in some difficulty in speaking immediately after the Minister. I did not know whether I would be able to participate in this debate as I thought I would not be here for the duration; it was only very early this morning that I realised that I could be here and put my name down to speak. I was intending not to deal comprehensively with the points that the Minister had made but only to raise three particular points in the expectation that I would be arriving towards the end of the debate. In fact, I do not need to deal comprehensively with what he said because I pretty well agree with everything.
	There is one general point I would like to make before I come to my three particular points. It should be stressed—indeed, it cannot be repeated often enough—that this is not a protectionist measure but is very much in the spirit of open and free trading that the Minister described.
	If it were a protectionist measure, we would be taking measures to prevent NASDAQ or others from taking over the London Stock Exchange or other exchanges based here. Indeed, it is almost the opposite of a protectionist measure. What it does do is recognise the asset to our open trading approach and to the City of London that our system of principles and risk-based, light-touch regulation, as conducted by the FSA, offers.
	Like others, I have on occasion been critical of some of the ways in which the FSA has over-regulated or been over-intrusive in other financial services, but I do not think that it applies to the issues of the exchanges and clearing houses. How much better is the approach of the FSA than the American approach that we now see of the box-ticking Sarbanes-Oxley induced system of excessive regulation both in terms of regulatory requirements and cost.
	I turn now to my three points. First, much was made in the other place of the paradox that an apparent increase in regulatory requirements is designed to prevent excessive regulation; that an extension of regulation is being introduced to protect our light-touch regulation and might lead to less regulation. An intriguing point was made in the debate in the other place by Ed Balls, the Minister, on 28 November. He intervened in the speech by my honourable friend Mark Hoban, who was saying that it was a curious irony that the Bill makes a small extension of regulation in order to protect the light-touch regulation that we see at the moment. At that point, Ed Balls said,
	"does the hon. Gentleman agree that, in order to make sure that we keep that deregulatory pressure on all exchanges, there is merit in the provision applying to all new rules and all existing exchanges regulated in London, and not simply to exchanges where there has been a change in governance?".—[Official Report, Commons, 28/11/06; col. 996.]
	That point was not much followed up later in the debate in the other place. I put to the Minister three questions. First, is it his interpretation of the Bill that it will keep the deregulatory pressure on all exchanges? Secondly, will it have the consequence, irrespective of change of control and affecting all London exchanges, of providing what has been described as a kind of deregulatory ratchet? Thirdly, how does he envisage that that will come about?
	On my second point, in the other place there was some concern about the lack of parliamentary accountability and scrutiny. The Government's regulatory impact assessment suggested that of the estimated 1,000 rule changes a year in our stock exchanges, clearing houses and so on, there would be only about 25 notifications, of which only one would be called in. So the RIA suggests that the measure will have a relatively low cost. We will not know for some time—beyond the 12-month grace period—whether that is so: whether it will be low cost, achieves its objective of avoiding excessive US-type regulation and leans towards being a deregulatory ratchet.
	On the question of parliamentary accountability, most of the scrutiny will come from Select Committees. I am a member of the new Select Committee on Regulators that our House has just set up. We are all familiar with the point that Select Committees in the other place cannot cover comprehensively the range of activities that they are dealing with, so the amount of time that each Select Committee—in this case, the Treasury Select Committee—could give to following up in a detailed way how deregulation works and how the regulator works is itself limited. Therefore, it is a role of this House and our new Select Committee, after a 12-month period, to take up the point that has been made in the other place as to how this Bill is working. Our Select Committee has been set up for only 12 months, but I hope that it illustrates why it would be wise for the Select Committee in this House to have a more permanent position and to be able to undertake that role.
	Dr Vincent Cable, speaking on behalf of the Liberal Democrats in the other place, questioned whether the Bill was really necessary. He did so on the basis that NASDAQ had already indicated that it would abide by the FSA rules and that there would be no change. He therefore asked why we had to legislate for it. However, there is such a thing as the law of unintended consequences, as we have clearly seen with the 2003 extradition legislation and treaty, or, perhaps more appropriate in this case, the law of possible foreseeable consequences if we do not pass the legislation. The extradition treaty, as we all know, was supported by so many of us because we believed that it was linked solely with terrorism, but it has been extended in other directions by the Americans to affect the NatWest Three and various business people. Just as we were told that the extradition treaty was being introduced to deal with terrorism offences and it was extended, so, in this case, NASDAQ may well state that it would operate under current FSA rules, but can we be sure that that would last?
	There is no doubt that the consequences of Sarbanes-Oxley have been greatly to the benefit of the City of London. Bob Greifeld, the chief executive officer of NASDAQ, has referred to the City and the London Stock Exchange as being the premier financial centre of Europe. He is only partly right because, as the Minister indicated in some of the statistics which he gave, it is now the premier centre of the world. There is a significant difference between the two.
	I give another example. So far in this financial year, there have been 155 initial public offerings in London, of which 40 were international. In the first half of this year, there were 40 IPOs for international companies on the London Stock Exchange. There were only six on the New York stock exchange. The LSE lists 614 international companies from 66 countries; the New York stock exchange lists 460 from 46. That demonstrates very clearly how the London Stock Exchange has overtaken the New York stock exchange and how London is truly the leading international financial centre. I suspect that that NASDAQ wants to acquire the LSE to get a slice of that action and to counterbalance the decline of the New York stock exchange and of NASDAQ.
	We have seen the outreach beyond the United States of the instincts of US legislators, regulators and lawyers. It is not beyond the powers of imagination to envisage a situation where, with the LSE under US ownership and an American-dominated management team, US regulation would be extended to London to level the playing field with New York and to attract international business, which is currently attracted to London because of the benefits which we offer, back to New York. We do not want to see an extension of American litigious practices and class acts to London.
	I seriously hope that that will not happen, but we cannot be sure. Winding up the debate in another place, the Minister, John Healey, reminded us that,
	"if an overseas owner were subjected to pressure under its home state law or regulations to secure that a UK investment exchange or clearing house was operated in practice in accordance with that state's law, the existing European regulation and the Protection of Trading Interests Act could not prevent lawful instructions being given by the foreign owners".—[Official Report, Commons, 28/11/06; col. 1027.]
	I support the Bill to avoid that danger ever coming about and to protect our approach to regulation.
	There is of course a risk in producing legislation in haste, which is that it may be flawed in some detail and does not work well in practice. I have had neither the time nor the resources which Ministers have, but I trust that that will not happen in this case. On the assumption that the Bill is so framed as to achieve the objectives intended, I hope that it will pass quickly into law.

Lord Teverson: My Lords, I start by thanking the Minister for not using the phrase "light touch" in relation to the Bill. I have spent some time in the venture capital area. In the context of light touch, it is worth reminding the House that the Financial Services Authority's handbook has some 23 volumes with approximately 10,000 pages, which would probably reach from the Table to the ceiling of this House. You can purchase a copy for £2,258. It may be a slight exaggeration to call that light touch but, as the noble Lord, Lord MacGregor, said, it is somewhat preferable to many other regimes elsewhere in the globe.
	In general I very much support the Bill although questions were asked on it in the other place. Questions need to be asked about it. For instance, the FSA already has complete control over the listing rules and produces the disclosure and prospectus rules. There is a source book on recognised insurance exchanges and recognised clearing houses, in which the FSA can lay down regulations. It is already very powerful in that area.
	In what circumstances is the Bill needed? I hope that the Minister will forgive me if I have completely misunderstood the position with regard to the alternative investment market. Having looked at the Bill, and the Financial Services and Markets Act to which it refers, I note that Section 300 refers solely to recognised investment exchanges and recognised clearing houses. That is fine for the main London Stock Exchange market and many of its recognised bodies, which it lists, but although the alternative investment market is a subsidiary owned by the London Stock Exchange, it is very specifically not a registered investment exchange; it is an exchange regulated market. It is very differentiated to avoid some heavy touch European regulation, particularly the prospective directive. The alternative investment market is not an RIE. I do not understand how it is protected by this legislation.
	Over the past 10 years AIM has been one of the great successes of the London market. It has raised some £34 billion worth of capital and has 1,500 listed companies. It is particularly successful in attracting overseas listings from 26 countries. I believe that some 250 overseas companies are listed on it. It has a great reputation for growth and light regulation. Unlike the LSE's internal rule book of some 250 pages, the AIM rule book has only some 35 pages and exists wholly to promote light-touch regulation. Yet, if the LSE were taken over as a corporation by NASDAQ or any other external body, clearly it would have ownership of AIM. I do not understand how this legislation covers AIM because it is not a recognised investment exchange.
	There is confusion regarding my next question. Who are we concerned about regarding over-regulation? Is it the recognised investment exchanges themselves or the corporations that list on them? The Minister mentioned the exchanges themselves. I should have thought that the FSA's current source books and powers enable it to control that totally. I refer to registration and deregistration. The rules regarding recognised bodies are laid out and come within FSA powers. However, the indirect regulation and rules concerning the companies that are listingon those exchanges are more difficult. If those companies also have listings on the New York stock exchange or elsewhere, or if the LSE is a subsidiary of a foreign listed corporation based in America, they will be subject to Sarbanes-Oxley whether we like it or not. It seems to me that we have a clash of legislation, rather than necessarily annulling the effects of Acts such as the Sarbanes-Oxley Act.
	This Bill gives the FSA powers generally to interfere in the way in which registered investment exchanges and clearing houses make rules, which may in no way be related to a takeover by a foreign, or any other, business. I would like to have the Minister's assurance that the legislation does not give an open book for the FSA to over-interfere in such exchanges and clearing houses.
	I very much welcome the legislation as an insurance policy, but I would like to be far clearer about what the dangers are, particularly whether the alternative investment market—which is one of London's jewels in the crown—is actually protected by the legislation, because I do not understand how it is.

Lord Newby: My Lords, at Second Reading I always ask myself three questions about a Bill: first, are the aims of the Bill desirable; secondly, do you need a Bill to achieve those aims; and, thirdly, if so, does the Bill set about it in the appropriate way?
	In this Bill, the answer to the first question seems to me, unambiguously, yes. Its purpose is to prevent excessive regulation being imposed by a London Stock Exchange owned by NASDAQ via the introduction of Sarbanes-Oxley type rules. There are two reasons for wanting to prevent that, one practical and one principled. The practical reason is that, as noble Lords have said, London has made an outstanding success of operating with what I was going to describe as a light-touch regime—given the comments of my noble friend Lord Teverson, I had perhaps better say that it operates with a relatively light-touch regime. However, that relatively light-touch regime has been one of a number of contributory factors towards its success in recent years. Although there is a huge rule book, it is noticeable that when the FSA asks for suggestions on how the rule book might be significantly reduced, it finds very few practical suggestions forthcoming.
	Over a period when London has been growing, however, New York has been contracting in certain respects. It is absolutely clear that the excessive regulation, as we see it, of Sarbanes-Oxley—which is a classic case of the unintended consequences of a Bill that was designed to do what at the time were non-contentious things—has had a significant, negative effect on New York. That has been to our advantage. Therefore, it would be pretty foolish to encourage or allow anything that undermines the advantage that London has had in recent times.
	The principled objection to the kind of imposition of Sarbanes-Oxley rules relates to the issue of extraterritoriality. It is for this country, within, when appropriate, the overall context of EU legislation, to decide what level of regulation it believes appropriate. It is always difficult to get the balance right, but it is for us in the UK to decide how we set about doing that. As we have seen in the recent NatWest case on extradition, the USA is very quick to seek to apply its rules extraterritorially whenever it can. It is a logical extension of the military and economic power that the US has. It is a cast of mind that people get into, but it is pretty arrogant to believe that you can always call the shots even outside your own jurisdiction. It is therefore unacceptable and should be resisted. That is one of the consequences of this Bill.
	Is the Bill necessary? How likely is it that a NASDAQ-owned LSE would in practice introduce Sarbanes-Oxley type legislation? If it sought to do so, why wouldn't the existing legislative framework be adequate to deal with it? On the likelihood of the Bill being necessary, the arguments are less clear-cut than seeing the aim established. One of the principal reasons for NASDAQ seeking to buy the LSE is to gain the benefits that, by driving business away from the US, Sarbanes-Oxley has brought to London. It would be perverse to introduce the very rules that would undermine the ongoing success of NASDAQ's new purchase. Indeed, it has said that it welcomes the Bill.
	That attitude is underpinned by the growing and, by now, widespread acceptance in the US in financial and political circles that Sarbanes-Oxley, in the way it has been interpreted and implemented, has gone too far. There is a strong likelihood that some of the rules will be repealed or relaxed in the foreseeable future. In those circumstances, it is unlikely that there wouldbe pressure on NASDAQ and the SEC to try to introduce Sarbanes-Oxley to the UK.
	An argument was also made in the other place that if the LSE adopted new and onerous rules, market competition should and could deal with that—that new exchanges that did not make such onerous requirements would and should be established. As we have seen recently with the Turquoise consortium of international banks that proposes to establish a new, low-cost share trading platform, such developments are possible, although they are not guaranteed—certainly, not in the short term.
	If there is a belief that one may need to apply regulatory pressure against the imposition of Sarbanes-Oxley type rules, why is existing legislation not adequate? As my noble friend Lord Teverson said, the FSA has plenty of powers to regulate exchanges. The Economic Secretary stated in another place, as the noble Lord, Lord MacGregor, mentioned, that the Protection of Trading Interests Act 1980 and EU regulations could be effective if an overseas authority sought to impose its national requirements directly on a UK exchange or clearing house in respect of its UK activities. However, if a US owner were pressurised into operating in accordance with domestic US law, existing EU and UK legislation could not prevent lawful instructions being given by that US owner.
	The Bill would prevent such an outcome by allowing the FSA to act against excessive legislation from whatever source. The nub of the Bill is that it protects NASDAQ against SEC influence to impose rules that it would like imposed here, when NASDAQ, having just bought an asset to avoid those rules, would be very unlikely to impose them. In a sense, one can see why NASDAQ may support the Bill as a way of protecting itself against SEC pressure on it back in the US.
	In summary, there is a "better safe than sorry" argument in favour of having a Bill at all. The Bill may well be unnecessary, but it would be pretty foolish if we had not legislated for circumstances in which it might be necessary and, for some perverse reason, a NASDAQ-owned LSE introduced over-prescriptive rules. There are some vague echoes here of last week's debate about Trident—we do not think that we will need to use it but we feel safer with it. At least this Bill is a cheaper option than Trident—and might be a safer one. My second argument is that it is important to lay down a matter of principle to the US that we will not simply accept extraterritoriality. This Bill sends such a signal, and that is useful in itself.
	If we accept, as I do, that a Bill is desirable, does this one do the trick? I think that probably, on balance, it does. It is very skilfully drafted by not mentioning a specific exchange or a specific potential owner. I agree with the Minister and the other noble Lords who spoke that this certainly is not a protectionist Bill, and we on these Benches share the view that we should be nationality-blind as to who owns institutions in the City.
	However, the question about the wide application of this Bill across all exchanges brings me to the first of two questions I have for the Minister. As the noble Lord, Lord MacGregor, said, the Economic Secretary in another place said that one advantage of the Bill was that it would keep deregulatory pressure on all existing exchanges operating in London. Do the Minister and the Government envisage that the FSA will use the new powers in the Bill against existing exchanges, or do they envisage that it really is clever drafting which actually has a narrower target? The second question—there was some discussion in anotherplace about EU legislation—is whether, in their wide consultation, the Government have consulted the European Commission and other member states. If so, as this is financial services legislation that is outwith the EU framework of capital markets regulation, have any concerns been expressed about any aspects of the Bill?
	With those questions, I reiterate that I believe this is an expedient Bill. As the Minister said at the beginning of the debate, the usual channels have agreed a timetable, which obviously I support. We look forward to having the Bill enacted by Christmas.

Baroness Noakes: My Lords, this is getting rather boring. For these Benches, I add our support for the Bill, and I thank the Minister and his honourable friend the Economic Secretary for the courtesy of letting me see a draft of the Bill a few weeks ago.
	As the Minister is aware, in view of the importance of the subject matter of the Bill to the City of London—using that term as a proxy for our vibrant financial services industry, wherever it is located and certainly beyond the confines of the square mile—we have unusually agreed to the shortened time frame for getting this Bill through, both in your Lordships' House and in another place. The advantage is that we clearly lay down the basis for future regulatory changes as early as possible, so there can be no misunderstanding for anybody who might seek to acquire a controlling interest in any of our investment exchanges or clearing houses.
	These procedures have a down side, however, in that issues may not have been examined in the depth necessary; my noble friend Lord MacGregor referred to that. There is some danger of a technical deficiency going unnoticed, or the appearance of our old friend the unintended consequence.
	The mere fact that this Bill is not opposed by the Official Opposition Benches or the Liberal Democrat Benches—or, indeed, by any significant body of opinion outside Parliament—is not necessarily a guarantee that we will make good law. We have only to look at the proximate cause for this Bill—the Sarbanes-Oxley legislation—for an example of what went wrong. In the wake of the Enron and WorldCom scandals, that Bill went through the US legislature with no opposition from within the legislature or outside. But it is manifestly flawed legislation which has imposed massive costs on US-listed companies, and of course those UK companies that also have a US listing, in return for benefits which, I believe, are now widely acknowledged to be not commensurate with the costs imposed. As a result, as other noble Lords have said, there has been a commercial disadvantage for the US capital markets, of which London has taken advantage.
	I do not want to labour this point because we have agreed with the Government that this Bill can proceed quickly. However, we need to recognise that there is a risk, and I hope that the Minister will say something this evening about the nature and the robustness of the Government's engagement with those potentially affected by the Bill.
	This may be a case where it would have been appropriate for the Bill to contain a sunset clause or possibly—I shall no doubt get into trouble for suggesting this—a power for the Government to amend further the Financial Services and Markets Act if it is discovered that the amendments covered by the Bill either do not do the job that they are intended to do or that they end up doing the wrong job. The Minister might like to say what consideration the Government gave to those mechanisms when drafting the Bill.
	I make it plain that my party is entirely open to ownership issues relating to exchanges or clearing houses: we entirely agree with the Government on that. The history of our financial services market, especially since the brave reforms undertaken by my party in the 1980s, has shown that ownership is irrelevant. We owe the vibrancy of our financial markets to the fact that the City is a good place for financial services businesses to be, as the studies undertaken by the Corporation of London, referred to this evening, clearly show. We outshine Tokyo and everywhere in Europe, and we do better than New York on many counts. This country has always welcomed financial services businesses from abroad, whether they are setting up from scratch or buying into existing UK businesses. My party has no truck with economic nationalism, and there is a good degree of consensus on that this evening.
	One hallmark of my party is our dislike of regulation and our commitment to deregulation. Before we sign up to additional regulation, we need to be satisfied that it is absolutely necessary. It is undeniable that the Bill creates new regulatory burdens which will apply to investment exchanges and clearing houses, in that it creates for the first time the power for the FSA to interfere in the nature of regulatory processes applied by the exchanges. There is a nice argument that says that the Bill is about stopping more regulation coming in by the back door and so it is really a deregulatory Bill, but I do not quite buy that. The FSA is a regulator. The noble Lord, Lord Teverson, referred to the zeal with which it approaches its regulatory tasks, and the Bill is giving it more powers to regulate.
	Clause 1 introduces new Section 300A into the Financial Services and Markets Act, allowing the FSA to disallow regulatory provisions where it believes that the provisions would be excessive. The danger appears to me to lie not in the explicit words of the Bill, which seem to confine the FSA's overt powers in an appropriate way, but in the fact that the exchanges and clearing houses will potentially have to negotiate with the FSA whenever they seek to make any change to their regulatory rule books. That gives the FSA an unparalleled opportunity to influence the rule books in the way that its current powers simply do not allow.
	To put that another way, the issue may not be the FSA saying "yes" or "no" to a regulatory change but, rather, that it has a position of power that it could use, perhaps not even consciously, to achieve objectives not directly related to the proposed regulatory change. For example, it could become known that the FSA favoured certain changes to consumer protection measures. Would an exchange or clearing house feel pressured to fall into line in order to get some other, unrelated regulatory change past the FSA and past the powers that we are introducing in this Bill?
	Perhaps the Minster will say something about the constraints, if any, on the way that the FSA will, in practice, use its new regulatory powers. The Minister said that the FSA would not use the powers for routine regulatory changes, but Mr Tiner's letter, to which the Minister referred, does not quite say that. I have concerns about that. Will the Minister say what will happen if the FSA starts to use these new powers more widely? Let us suppose that it is rather taken with its new regulatory power and seeks to use it not once but many times a year, and that it starts to impose significant costs on the exchanges and clearing houses within the Bill. What could the Government do about that?
	One possible constraint could be judicial review. As judicial review is process-focused rather than substance-focused, we cannot regard it as a first line of defence against the FSA's incorrect use of its powers. I hope that some other constraints can be shown to exist. While I do not rate judicial review as a great protection against the powers of the state or its organs, I have one question for the Minister which arises from how judicial review would proceed. This point was made by my honourable friend David Gauke in another place. I have given the Minister notice that I intend to raise this issue.
	The meat of this Bill is in Clause 1, which adds new Section 300A to the Financial Services and Markets Act. The new power in Section 300A(2), to direct that a proposed provision must not be made, will have to be construed for judicial review purposes in the context of the four regulatory objectives set out in Section 2 of the Financial Services and Markets Act. Those are market confidence, public awareness, the protection of consumers and the reduction of financial crime.
	Noble Lords who took part in the deliberations on the Financial Services and Markets Bill—that does not include the noble Lord or myself, as we were not then in your Lordships' House—will know that there was extensive debate on whether those four regulatory objectives should be extended to include a fifth, the competitiveness of the UK's financial services industry. Due to the way in which the Financial Services and Markets Act is drafted, if there is any conflict or prioritisation between consumer protection and competitiveness, the FSA would have to award victory to consumer protection. Competitiveness is not a regulatory objective for the FSA and hence can come into play only if all other things are equal.
	If we assume that the London Stock Exchange is taken over by NASDAQ and further assume—although it may appear unlikely at the moment—that NASDAQ decides to add rules along the lines of Section 404 of the Sarbanes-Oxley Act, it is fairly sure to argue that that was necessary on consumer protection grounds. That is what Senator Sarbanes and Senator Oxleydid when they proposed their own legislation. Let us further assume that the FSA wants to use its power in Section 300A(2) to direct that this should not be added. NASDAQ would then seek a judicial review, which would look, first, at whether the FSA was acting within its own regulatory objectives. As the competitiveness of the UK's financial services is not a statutory objective, but consumer protection is, would the FSA not in practice be vulnerable in a judicial review?
	The Minister should note that I am not framingmy question by reference to the terms of newSection 300A and the elaboration of "excessive" found in subsections (3) and (4). Those come into play only if the FSA can indeed make a direction within subsection (2). Meeting the tests laid down in subsection (3) and taking into account the mattersin subsection (4) are not a substitute for the direction being within the FSA's statutory objectives. Put another way, Section 300A does not exist in isolation. It has to be seen in the context of the FSA's objectives as already laid down in Section 2, and those objectives contain nothing about the competitiveness of the UK's financial services.
	This is a complex area. It was debated in another place, but it did not achieve the desired level of clarity, which I hope the Minister can achieve this evening. We might have preferred to see some aspects of the Bill expressed differently. The real rationale forthe Bill is the potential for regulatory burdens to be imposed following a change of ownership of the London Stock Exchange, but the Bill is not drafted in those terms. It gives a much broader power to the FSA. It may be that the FSA will use the powers with moderation and will not impose excessive burdens. It might even act as a deregulatory ratchet, although I am not holding my breath for that. We should be wary of conferring broader powers than necessary, in case future generations of FSA leadership are less scrupulous than the incumbents.
	Another aspect of the definition of "excessive" in subsection (3) of new Section 300A is that it is calibrated by reference to Community law, so if Community law is excessive we are stuck with it. That is doubtless a by-product of our treaty obligations. We know that most of the regulation we must apply in the UK, including for financial services, emanates from Europe. Now, for example, the financial services sector has to cope with MiFID—the markets in financial instruments directive—which will cost up to £1.1 billion to implement and over £100 million a year to operate. We really need a power in the Bill to strike down excessive regulatory burdens, full stop—including those coming from Europe. I accept that, for this Bill at least, that is a pipedream. I hope that the Minister can answer my questions today, so that we can clear the way for an easy and rapid passage through the remaining stages.

Lord McKenzie of Luton: My Lords, I am grateful for the attention your Lordships have given the Bill today. I thank noble Lords for broad—and, in some instances, enthusiastic—support for this measure. Before responding to some of the detailed points about the Bill, I shall stress some of the most important, emphasising what has already been debated.
	First, we are legislating not to impose regulation but to avoid it. Of course, this sounds like a paradox—a point debated in the other place—but it goes to the heart of what we want to achieve. We want to safeguard our pragmatic and successful regime for market regulation. From today's debate, that is something we all share. This country's proportionate risk-based regulatory regime has made London a magnet for international business and an economic asset for the UK, for Europe and for countries throughout the world. As I said before, that is widely recognised in many other countries.
	The Bill will deliver that objective. It enables the Financial Services Authority—widely respected as one of the world's leading financial regulators—to veto disproportionate regulatory changes proposed by exchanges and clearing houses for the markets which they provide and support. It also puts mechanisms in place which will enable the FSA to ensure that this will not impose any unnecessary or excessive burden on exchanges and clearing houses themselves.
	I also emphasise that the Government have not changed their attitude towards foreign investment in our financial services industry. It should therefore be clear that the Government do not have, and will not express, any views about the merits of the takeover bid for the London Stock Exchange made by the US NASDAQ stock market, as I indicated earlier. We will not intervene in the judgments of owners of those shares or in the judgments which the Financial Services Authority and competition authorities must make in their respective fields.
	The noble Baroness, Lady Noakes, mentioned the tension between the FSA's different regulatory objectives and their interaction with the requirements of the Bill. I shall spend a little time on this. Some of it perhaps almost strays into Committee territory, but it would be good to get something on the record. I am grateful to the noble Baroness for giving me advance notice of her intention to raise this matter.
	The question may be summarised as querying whether the FSA regulatory objective for the protection of consumers must always trump other considerations, such as the need to maintain UK competitiveness, when the FSA is considering exercising its veto over potentially excessive regulatory provision. Put this way, the answer is "No", and I shall say why shortly. It is first worth exploring what would happen in practice and how the different legal provisions, which the noble Baroness rehearsed, might be engaged.
	The scenario will always have three elements: first, a UK recognised body wishes to bring in some new regulatory provision and notifies the FSA; secondly, the FSA calls in the proposal and, after fulfillingthe other procedural requirements in the Bill, decides that the proposal would be excessive and directs the recognised body not to make it under the newSection 300A(2); and, thirdly, the recognised body challenges the FSA's decision to make the direction by judicial review.
	For such an action to succeed, the recognised body will have to demonstrate that the FSA's decision was ultra vires, or that there were serious procedural inadequacies, or that the decision was unreasonable in the sense that it was a decision that an authority, when acting in accordance with its powers and having considered all relevant factors and discarded those which were irrelevant, could not rationally have reached. It is worth recalling that it will be for the FSA to review the proposed regulatory provision and judge whether it is excessive. Assuming that there is no question about the FSA's powers or processes, it will be for the court to review the FSA's decision and conclude whether that decision was unlawful or unreasonable in the sense described. To succeed, the recognised body would need to demonstrate to the court that no reasonable person in the FSA's position could properly have taken the decision that it took. The court will not find for the applicant just because, if it had been taking the decision on the basis of all the factors that the FSA considered, it might have reached a different decision.
	We now have to consider the impact of the protection of consumers objective in such a case. In particular, a challenge might, as was suggested, seek to argue that if the FSA had given proper weight to that objective, it could never have concluded that the proposed regulatory provision was excessive. For instance, the argument might be that the FSA should have borne in mind that provisions of the same sort deliver consumer protection in another state.
	There are three points to note. First, the protection of consumers is only one of the four regulatory objectives that the FSA has under Section 2(2) of the Financial Services and Markets Act. The othersare market confidence, public awareness and the reduction of financial crime. I must stress that those objectives are not objectives of the FSA's business in the sense of business objectives, and still less are they meant to be objectives that the financial services industry or any individual exchange, clearing house or firm is meant to deliver. Rather, they operate more as constraints on how the FSA exercises its general functions. The extent of the obligation in Section 2(1) of the Financial Services and Markets Act is that the FSA is required to,
	"so far as is reasonably possible act in a way ... which is compatible with the regulatory objectives; and ... which the Authority considers most appropriate for the purpose of meeting those objectives".
	So while the authority is to meet those objectives, it is for it to decide how to go about doing so. It would be quite impossible for the FSA lawfully to concentrate on only one of its regulatory objectives to the exclusion of the others. It has to give due weight to all of them and if it did not—for example by giving too much weight to the protection of consumers—it might be vulnerable to a challenge.
	Secondly, in Clause 1 the Bill refers to "a reasonable regulatory objective". It does not refer to the FSA's regulatory objectives that I have just discussed. In deciding whether a particular proposal pursues a reasonable regulatory objective, that question will have to be considered by reference to the particular proposal, the circumstances of the particular exchange or clearing house proposing the provision—not those of the FSA—and all other relevant circumstances. I am not saying that the protection of consumers could not be a reasonable regulatory objective—of course it could—but whether in the case of a particular proposal the objective being pursued was a reasonable regulatory objective would depend on all the circumstances.
	It seems to be being suggested that in these circumstances the only relevant objective would be the protection of consumers. That would not appear to be the case. These circumstances are necessarily dealing with financial markets and exchanges. I refer the noble Baroness to Section 3 of the FSMA which expands on the market confidence objective. Further, in exercising its functions, including that of taking decisions under the provisions of the Act, the FSA must have regard to the matters listed in Section 2(3). It is not the case, as has sometimes been implied, that the matters in Section 2(3), which include,
	"the desirability of maintaining the competitive position of the United Kingdom",
	are in some way subordinate to the regulatory objectives. These matters are really engaged in a slightly different way when the FSA makes its decisions and they must also be given the appropriate weight in the circumstances.
	Thirdly, even if the FSA protection of consumers' objective was engaged, that objective is to secure the appropriate degree of protection for consumers. It is for the FSA to decide what the appropriate degree of protection of consumers is. Regulatory provision which went beyond that clearly could "be disproportionate to the end to be achieved" or, equally, it might be considered as not pursuing a reasonable regulatory objective. It would be for the FSA to decide whether that was the case, having regard to all the relevant circumstances in accordance with new Section 300A(4). Just because something is or purports to be for the protection of consumers, it does not follow that it either cannot be excessive or is the appropriate degree of protection.
	The final point raised in this context is whether the fact that the same regulatory provision is already in place in another country means that it must be appropriate or can never be excessive. The answer must clearly be no. I have dwelt at some length on that point to get it on the record. If, on reading Hansard, the noble Baroness or any other noble Lord wishes to raise further points on that before Committee, I would be very happy to seek to set up appropriate meetings.
	I will seek to deal with some of the other points raised. The noble Lord, Lord MacGregor of Pulham Market, made the point that this is not a protectionist measure. That is absolutely right; and it would be completely the wrong way to go. I was asked whether these rules would in practice keep deregulatory pressure on the exchanges. I believe that they will because of the processes that have been put in place. The need to notify the appropriate rules is a good mechanism to keep pressure on the exchanges.
	The issue was raised about parliamentary scrutiny. The impact assessment talks about post-implementation review. The effectiveness of the proposal will be demonstrated by the continued attractiveness of London as an international financial centre and the competitiveness of the UK financial services sector. In practice, these will be difficult to observe and measure, but the Treasury will be able to keep the effectiveness of the policy under review through its ongoing dialogue with stakeholders in the City and other parts of the UK financial services sector. Obviously, that is part of the review and scrutiny. There is another role for Parliament, as the noble Lord has indicated.
	The noble Lord also made the point about whether we might have assurances from NASDAQ that it will always abide by the current regulatory regime—I resist the terminology of the noble Lord, Lord Teverson—but that will not always necessarily be the case, which is why we need this legislation. The noble Lord recited what happened to IPOs. The report I referred to showed over a relative short period how the US market lost out big time.
	The noble Lord, Lord Teverson, raised the point about John Healey's comments. As I understand the point about extraterritorial jurisdiction, the European Commission has competence for dealing with extraterritorial measures taken by third countries against EU member states. The EU regulation was ratified in the UK as an amendment to the UK Protection of Trading Interests Act. A direct attempt to impose obligations on a territory is a different issue; we are dealing with an attempt coming through an ownership and control structure. That is why we must have particular regard to that.
	The noble Lord, Lord Teverson, talked about how extensive the FSA's handbook was. He may have studied it more assiduously than I have. We are dealing here with recognised markets. These are largely outside the detailed rule-making of the FSA, which is partly how the light-touch approach comes about. Much of the FSA's rulebook is applied to others where it is the FSA's job to make the detailed rules.
	The noble Lord asked about how AIM is protected. My advice is that AIM is a market of the London Stock Exchange, and part of the London Stock Exchange, not a subsidiary company. So both the LSE main market, which is a recognised market for the purposes of the prospective directive, and AIM, which is not, are regulated in the same way as parts of the recognised investment exchange. Therefore both are covered by the new legislation.
	The noble Lord also asked whether this is an open book for the FSA to over-regulate—a point also made by the noble Baroness, Lady Noakes. It should not be. The provisions are targeted and specific. At the end of the day, there is the process of judicial review if the FSA were to act in an overbearing way. The noble Baroness also asked whether undue pressure can be brought to bear. The legislation is about specific rights to veto proposed rule changes. Again, if the FSA sought to stray outside that authority to use it to apply pressure, it could be subject to review.
	The noble Lord, Lord Newby, asked whether the Bill is necessary. In reality, we will know in due course. It is a precautionary measure that will be useful to have because, if there were a takeover and if that brought a change to the regulatory environment, that would be a great pity. The noble Lord suggested that market competition would deal with overregulation. The problem with that mechanism is that it would take some time to accrue and costs would be involved in people moving off the exchanges. Why is not existing regulation effective? Presently, the FSA has powers not to recognise an exchange, but that would happen after the event and would be a fairly draconian application of the rules. That is why the Bill is necessary.
	The noble Lord asked about discussion and consultation in Europe. I will have to write to him on that because I do not have anything specific in my briefing. However— again making reference to the regulatory impact assessment—the Treasury has consulted with the FSA. This is a narrowly focused measured concerning a matter that is unlikely to be of wide general interest which the Government want to take forward with all reasonable speed. The Treasury therefore decided that it would not be appropriate to undertake a formal, public consultation on its proposal. The Treasury has shown the proposal informally to UKRIEs and RCHs, relevant trade associations and other key stakeholders, so there has been a degree of consultation, but I shall write specifically to the noble Lord on the issue of engagement with the Commission.
	The noble Baroness, Lady Noakes, reminded us that things are done in haste with a good deal of support do not always produce the right answer. Sarbanes Oxley is a classic case of that. It was suggested that there be a sunset clause and asked whether we are happy about the robustness of the legislation. One provision is limited to 12 months: the waiver provisions while the FSA gets its rule book up and running—work is being undertaken on that the moment—but it would not be appropriate to go beyond that. I repeat that this is fairly targeted legislation with a good deal of protection surrounding it. It was touched on whether the FSA would be able to use its power to force other changes. I do not believe that it would, as this is a narrow power to veto specific planned changes to the rule book.
	I hope that I have dealt with each of the points raised by noble Lords. If not, I am happy to read the record and follow up later.
	The Bill builds on the system that we already have and provides effective and flexible machinery to deliver an important policy objective: to ensure that market regulation here fits with the overall approach to financial regulation in the UK and in Europe. It fulfils the Government's commitment to safeguard the United Kingdom's proportionate, risk-based approach to market regulation. It will ensure that London remains a magnet for international business and foreign investment and it will do so without imposing an unnecessary or excessive burden on the exchanges and clearing houses. I commend the Bill to the House.
	On Question, Bill read a second time, and committed to a Committee of the Whole House.

Lord Anderson of Swansea: rose to ask Her Majesty's Government what proposals they have for the future status of Kosovo.
	My Lords, I welcome the opportunity to open this short debate on Kosovo. It is timely because the status problem is likely to be resolved shortly, and it is important that your Lordships should be able to express views beforethat decision is published. Perhaps the Ministerwill confirm the expected timetable. We know that Martti Ahtisaari, the UN special envoy, has delayed his report until after the elections in Serbia on21 January. His proposals are then likely to be passed to Pristina and to Belgrade in February, and to be published in March. The EU Commission has already given its views on the importance of the decision in its annual report, which was published on 8 November. In addition, the text of the Council's joint action on the establishment of the EU preparatory team has declared that the EU has a vital interest in a positive result of this process and stands ready to enhance its role in Kosovo following the status settlement.
	Technically, of course, Kosovo is now part of Serbia and therefore regularised by UN Security Council Resolution 1244, but it is in legal limbo and, in practice, a UN protectorate, which leads to intense frustration among the Albanian majority. The EU report states that the status issue has dominated Kosovo politics and has deflected Kosovo from necessary internal reforms. It points out some areas of improvement, such as strengthening the Assembly's role and establishing new institutions, but its overall tone is very negative. In particular, it highlights alack of, or inadequate, progress in key political and economic fields, and points out that unemployment remains high and that more needs to be done in fields such as organised crime, the trafficking of human beings, and drugs. Otherwise, as optimists might say, it is a highly favourable report. It is sad to reflect that the imminence of the decision on status has been known for some time but that it did not stimulate greater effort to make progress in Kosovo.
	It might be helpful to look at Kosovo in its regional and historical context. The prospect of EU membership is a major positive factor for the west Balkans as a whole. The EU correctly recognises that much of the solution lies in boosting regional co-operation and integration and in reducing the existing barriers to intra-regional trade. Yet we know that we face enlargement fatigue and that the question of absorption capacity lies like a cloud over the whole region, even over Croatia.
	There is also some evidence of recent backsliding in the region. There is strain in Macedonia, for example, following the July elections, which some see as a threat to the Ohrid Framework Agreement. And a year after candidate status was accorded to Macedonia last December under the UK presidency, the EU has still not decided to begin accession negotiations. Then there was the October election of Silajdzic for the Bosniak presidential seat in Sarajevo, mounting extremism in Bosnia, and the Serbian referendum on 30 October, which included a clause declaring Kosovo as an integral part of Serbia.
	What of Kosovo itself? Obviously we need to place Kosovo in the context of the negative legacy of the former Yugoslavia. It was the poorest province of former Yugoslavia, and much neglected. The UNDP states that the per capita income is now just over $1,000 per annum. It does have some natural resources, particularly lignite. It has enough lignite to power the country for 200 years, but it is located in areas of tension and there is low investment in it, due partly to low energy-bill collection and to land title problems. All this might, of course, improve when the status question has been resolved.
	On my several visits to Kosovo I have noted a lack of community spirit which includes lack of indigenous NGOs, crime, violence, and alas a dependency culture. Of the population of 2.473 million, 60 per cent are unemployed and 55 per cent are under the age of 30. The average age of the Albanians is 28 and of the Serbs 54. A recent study by two formers members of UNMIK argued that the UN had been insufficiently robust in tackling what they call the "thugocracy". They state that,
	"most Albanians who took up arms to challenge Serbian oppression did not object to one ethnic group bullying all the others; they simply wanted their ethnic group to be the one on top".
	However, the inventiveness and enterprise of the Kosovars from 1989 to 1999—the university is an example—shows that they are capable of enterprise even if they have shown little capacity for it since the war.
	It is small wonder that Martti Ahtisaari appears to have concluded on the basis of his experiences since February that an internal consensus is not available and that an imposed solution is inevitable. Commentators fear riots by one side or the other when the proposals are published. There is of course much combustible material from the past, but we cannot ignore the reality that 90 per cent plus of the population have a fixed determination for independence. Equally, they cannot be given a blank cheque. The result is likely to be a unique formula—independence, but with strong conditionalities, including protection of minority rights and substantial decentralisation to Serbian municipalities.
	It has been a bad year for Serbia, which has lost Montenegro and is about to lose Kosovo. It has a victim complex, conveniently forgetting the responsibility of Milosevic for its troubles and simply refusing to recognise current realities, as the referendum showed. But the international community should be sensitive to the legitimate concerns of a proud country and should do nothing to humiliate it. There is recent evidence that the international community has recognised this, including the decision on 20 November at the Riga summit of NATO. I also think of the European Union opening visa facilitation negotiations on30 November, which it hopes to conclude by the end of next year. It is all part of what has been called an EU charm offensive. There must have been strong international guarantees of minority rights with sanctions for any infringement. Again, Javier Solana has undertaken to review, after the Serb elections in January, the reopening of SAA negotiations, which were suspended in May. Clearly, the European Union hopes that this will encourage a moderate outcome of those elections.
	There is also a major challenge to Kosovo to act responsibly. It is fair to say that Prime Minister Ceku has taken a limited number of initiatives on national reconciliation, but the immediate prospect is difficult. Even if there is conditional independence, as recommended, this could well not be accepted by the Security Council and any status change depends on an amendment of UN Security Council Resolution 1244.
	Russia is now in a more assertive mood and may well see independence as a negative precedent for Chechnya and could well seek to make trouble in the frozen conflicts in Georgia—in Abkhazia and South Ossetia—and in Moldova in relation to Transnistria. China's response may be influenced by Taiwan and Tibet. Even though the West argues that Kosovo is unique, Russia and China may demand a price if they do not veto. Even if the Security Council, as expected, issues a mandate for the European Union, over time more countries will recognise Kosovo's independence, whatever the Russian and Chinese position.
	I end with a series of questions to my noble friend. What are the current assumptions by his department to the response of Russia and China at the Security Council? What safeguards does he expect, apart from minority rights? Does he anticipate a continuing role from NATO even if there is an ESDP mission? I am of course aware that the GAERC at its meeting today and tomorrow will consider a proposed council joint action to extend the mandate of the EU planning team. Is my noble friend confident, however, that the European Union has fully recognised the scale of the task that awaits it in Kosovo and is making the necessary budget amendments?
	The International Organisation for Migration, IOM, has stated that trafficking in women and girls is now the third source of income, after arms and drugs, for the Albanian mafia network. Will he undertake to ensure that the problem of human trafficking is given high priority in any negotiations? What steps are proposed to tackle the problem of the 300,000 illegally held small arms in Kosovo that Saferworld reports are held there? Finally, and perhaps most importantly of these questions, what specific contribution will the UK make in terms of finance and technical assistance?
	I have one final reflection. I posed the question of what is our interest and that of our European Union partners. The answer is surely a Kosovo that is as stable as can be managed during and after the transition period, with a clear perspective of eventual membership of Euro-Atlantic institutions. Bluntly, if we do not go to them and help them manage the transition, they will come to us in the shape of refugees, illegal immigrants, organised crime, drug barons and human traffickers. Kosovo will ultimately be independent politically, with no conditions, if—and, given all its problems, perhaps this is a big "if"—it meets the relevant EU criteria. Then, and only then, it should be welcomed as a full member of our European family.

Lord Ashdown of Norton-sub-Hamdon: My Lords, I am delighted to follow the noble Lord, Lord Anderson of Swansea. He and I have stood together on many occasions and on all of them, I think, we have stood on the same side on crucial foreign policy issues. I followed his perceptive speech with a good deal of interest and agreement, and I shall touch on some of the matters that he did.
	I cannot quite agree with the noble Lord thatthe October elections in Bosnia produced a more nationalist outcome. In fact, all the nationalist parties were weaker at the end of those elections than at the beginning. I do not think that Haris Silajdzic is any more nationalist than the Bosniak whom he removed in the elections.
	I have kept quiet on the Balkans since I left there at the end of January because I believe that, when you leave the stage, you leave the stage, and I wanted to let some time go by. However, time and events now persuade me to say one or two words about an increasingly troublesome situation in the western Balkans. I fear that I shall be critical of the international community, but that criticism does not extend to the policies of Her Majesty's Government, which are correct, robust and well targeted; I suspect that what has happened recently in the Balkans is despite them, rather than because of them. I pay particular tribute to the Government's ambassadors on the ground in the western Balkans, especially the remarkable and extremely able Matthew Rycroft in Sarajevo.
	I fear that I cannot be so complimentary or encouraging about the recent policies of the international community in the Balkans. The noble Lord, Lord Anderson, is correct: things have gone backwards in the past year or so. I find the situation at present extremely troublesome. There are brighter signs: Macedonia, despite the election, seems to be moving forward gently, and Albania continues to surprise us by its progress. However, I deeply regret that the international community has allowed the remarkable progress made over the past years in Bosnia and Herzegovina—not during my time alone, but before that—to be checked. In my view, the situation in Bosnia and Herzegovina has now moved into reverse.
	Maybe all this is because it is election year or because Governments still have to be formed. Elections were held in October and I do not suppose that the Governments will be formed until February, if the past is anything to go by. But I fear that it is more than that. I am especially disturbed that the Republic of Srpska has been allowed again to behave in a fashion by which it seems to indicate that it thinks of itself not as part of a state but as a state itself. It has gone backwards on the agreements made to transfer powers to the state level in Bosnia and Herzegovina. It has reneged on the agreements that it made about police reform. It has been allowed to threaten referenda, which is deeply irresponsible in the context of Bosnia and Herzegovina, especially as they have been proposed contrary to Dayton. It has been allowed to begin to open representation in capital cities abroad, and allowed—even encouraged—by Belgrade to entertain the idea that a resolution in Kosovo would need some change in the status of the Republic of Srpska and the borders of Bosnia and Herzegovina.
	Meanwhile, it seems that the Serbs in Belgrade have decided once again that the way to the futureis back to the past. The Serbs are a great and remarkable people, for whom I have admiration and respect; nevertheless, from time to time, they love to believe that it is Serbs against the world. I fear that that is happening. I fear that the elections on21 January will see a shift to the right and a rise in the power of Seselj's party.
	Against this, we must view the situation in Kosovo. Here I fear that we made a mistake right at the start. There is a rule about peacemaking—if the international community, together with the local community, can form a common project that they can seek to achieve together, they can move things forward. But I regret that in 1999 we left a vacuum where the answer to the only question that anybody wanted to ask—what is the status of Kosovo?—should have lain. One thing was plain and obvious—whatever else happened, Kosovo could not again be governed by Belgrade. But we would not admit that. I cannot imagine why.
	By their actions in Kosovo, the Serbs lost the moral right to govern a province in which they had only5 per cent of the population. But our incapacity to tell Kosovo at least that it would not be governed by Belgrade did two things: it enabled the nationalists in Belgrade to play the issue for votes and it enabled the destructive forces in Kosovo to fill the vacuum that we would not fill with an answer by seeking to provide the answer themselves, usually by force or the threat of force.
	We must address the issue that we should have addressed in 1999. This is not the benefit of hindsight. With Senator Joe Biden, I wrote a paper in 1999 for both our Governments, recommending that we should at least recognise that Kosovo would never again be governed by Belgrade; we argued that to allow Belgrade the illusion that that might be so and to allow Kosovo the opportunity to doubt our intentions on this matter would only damage the prospects of making peace there. That is what has happened.
	We proposed at the time that some tests should be set for Kosovo. When it had reached those attributes that a state can fulfil—good relations with its neighbours, proper protection of human rights, protection of property—we might entertain its claim for statehood. In 1999, we proposed what later became known as "standards before status", but by then it was too late because the malevolent forces had already gathered and both sides, in Kosovo and Belgrade, had begun to grip the situation that we had failed to grip. So now we must return to this question.
	I heartily congratulate Martti Ahtisaari, whose patient, sagacious and determined diplomacy has produced a set of proposals, the outline of whichis visible to all. What is proposed is strong decentralisation, strong protection for minority rights—in this case, the Serbs—and a form of independence under international tutelage. I think that that is the right solution. However, it was not right that the international community, faced with the Ahtisaari proposals—he has now finished his work and there is nothing further that he can do—decided yet again to delay. I cannot imagine why. I suppose that it was in the mistaken belief that, somehow or other, delaying until 21 January might save us from a backlash from the right in Serbia. It will not. It is almost never right in the Balkans to delay or to appease. We have simply allowed the nationalist forces to gather around behind the delusion that Kosovo might have some status in the future other than ultimate independence. That has been extremely damaging.
	I hope that delay will not continue. It does nobody any good. The Ahtisaari proposals are there. We all know that the Russians are opposed to them and that some new members of the European Union will follow the old, historic pro-Belgrade policy in whatever circumstances, but this is a nettle that must be grasped. I hope that we will have the Serb elections on 21 January, and on 22 January we will announce what the Ahtisaari proposals will be. Belgrade will want to delay again. It will say, "Hang on, let's wait until we have formed a Government, months down the track". The Belgrade policy is very clear. It wants to provoke the Kosovo Albanians into a strong reaction—one of force, disturbance and instability. That is Belgrade's game and we should not be playing it.
	I suspect that the Government share that view, although they have probably not been able to say so. I suspect that the Government did not want NATO to abandon conditionality on Karadzic and Mladic, but we were forced to do so because of a sudden and unexpected volte-face by the United States, which I deeply regret—it was wrong. I suspect that the Government have been taking a robust line on this question of delay and I recommend that they continue doing so.
	I have one final point. The one thing that keeps the western Balkans on the track of reform is the magnetic pull of Brussels—nothing else. The sadness is that that magnetic pull has weakened because there is doubt in the capitals of Europe about whether we want the western Balkans in the EU. The question of enlargement has become muddled up with Turkey. But this is not about expanding Europe beyond its present borders. It is about unfinished business within our present borders. The noble Lord, Lord Anderson of Swansea, is right. If we do not bring them in, we will find them in our cities, with criminality and trafficked women, because that is the corridor through which they come. It is in Europe's interest to keep that magnetic pull strong and to keep the western Balkans on the track of reform. The international community has allowed that to slacken; it has allowed the conditionality and the magnetic pull of Brussels to be weakened in the past year, and the Balkans are now moving backwards. They will not return to conflict, but they will stay in a black hole of dysfunctionality and criminality for as long as we allow this to continue.
	I deeply regret the way in which things are going. I hope that the Government and the international community will insist that the Ahtisaari proposals for Kosovo are published on 21 January, that there is no further delay and that this nettle is grasped—and that we do at last in the early part of next year what we should have done in 1999.

Lord Hannay of Chiswick: My Lords the international community is facing a critical moment in what could—and, one hopes, will—be the final chapter in the cascade of events, many of them tragic and many of them not too brilliantly handled, that followed the break-up of the former Yugoslavia. The long-awaited report on the future of Kosovo by the UN Secretary-General's special representative, Martti Ahtisaari, to which the noble Lords who preceded me referred, has in my view—and in this I differ from the noble Lord, Lord Ashdown—wisely been postponed until after the Serbian elections in January, although I firmly agree with the noble Lord that it should not be postponed further after that.
	The challenge remains how to ensure that this final chapter in the break-up of Yugoslavia is completed in a way that ensures a peaceful transition to a future that meets the legitimate aspirations of the Kosovars while guaranteeing the human rights of all the inhabitants of Kosovo and ensuring peace and stability throughout the Balkan region. That is easy to say but difficult to do. The Question asked by the noble Lord, Lord Anderson, could not, therefore, be more timely.
	Perhaps the easiest part of the question to answer is what the legitimate aspirations of the Kosovars are. With roughly 90 per cent of the population of ethnic Albanian origin and their absolute determination to have an independent state of their own, it is hard to see how any outcome could be accepted and respected that does not in one way or another and in some predictable timescale secure their independence. But answering that question is only the beginning of any solution. It raises the need to protect, not only on paper but in everyday life, the human rights of the minority populations in Kosovo, most obviously but by no means exclusively the Serbs. It raises also the spectre of a greater Albania, which has the potential to be intensely destabilising right across a region which contains several states with substantial ethnic Albanian minorities. It raises also the question of the prospects for EU membership of Kosovo and its neighbour, Serbia. Finding answers to all those questions, not just the simple one about Kosovo's independence, is likely to determine whether any outcome can be sustainable and achieved peacefully.
	From time to time, it has been suggested that a possible solution to the problem of minorities would be to detach from Kosovo as it is presently defined those geographical areas which are principally inhabited by ethnic Serbs and to incorporate them in Serbia. However, such a solution would surely cause more problems than it would resolve and create destabilising pressure for further territorial adjustments in the region, including in Serbia. It would be to enter the logic of ethnic cleansing, which we should now aim to put behind us, not to legitimate. But if that solution is to be rejected, it is all the more essential that the personal and political rights of minorities should be permanently entrenched in whatever constitution an independent Kosovo adopts, and that the practical implementation of such rights should be ensured for at least an initial period by some degree of international supervision. As to the spectre of a greater Albania, it would probably be best if that were to be quite explicitly ruled out in any settlement which is reached over Kosovo.
	In the longer term, by far the most important of the questions which I have posed, and which has to be answered, is that relating to Kosovo and its neighbours' future prospects of one day joining the European Union. There, I firmly join both noble Lords who have preceded me in saying that that is crucial to getting this situation right. It is that prospect which offers the best hope that political institutions, the rule of law and free economies will evolve steadily in a positive direction, and that nationalist pressures and rivalries will be kept firmly under control. Without that prospect, or if that prospect becomes shrouded in doubt and dispute, the chances of a successful evolution will be sharply reduced, and the risk of developments which could drag the Balkans back towards back to the nightmare conditions of the 1990s would be increased. Thatis why the European Union's current bout of enlargement fatigue is potentially so extraordinarily damaging, to itself as much as to anyone else, and why it is so important that the European Council meeting in a few days' time moves decisively to confirm the commitments earlier entered into with respect to all the countries of the west Balkans. I hope that the Minister will say something on that point.
	Even if all these questions can be satisfactorily answered, shadows remain over the prospects for Kosovo, most notably the attitude of Serbia and the manoeuvring of the Russian Federation, which has recently begun to hint at some obscure and unacceptable linkage with problems in a quite different geographical region, the Caucasus, presumably in connection with Abkhazia and South Ossetia. By using its veto, Russia can prevent the Security Council's endorsement of any proposals put forward by Ahtisaari, even if they are backed by an overwhelming majority of the other members, but it cannot prevent Kosovo's independence being accepted by that same overwhelming majority, thus becoming an inescapable fact of international life. Moreover, it cannot hope to impose an outcome parallel with that in Abkhazia and North Ossetia, given the Security Council's frequently reiterated confirmation of Georgia's sovereignty and territorial integrity. It would surely be far better, therefore, for Russia not to brandish the threat of such linkages, but to negotiate in good faith in the Security Council on the basis of whatever proposals with which Ahtisaari comes forward and which will then be endorsed by the new Secretary-General of the United Nations.
	One thread that runs through all these analyses of the Kosovo problem is the absolutely central role of the European Union. In some parts of our media, even in some parts of your Lordships' House, it is customary to mock the European Union's common foreign and security policy as if were some kind of will-o'-the-wisp or fantasy. But in the Balkans it has been a key element for years. It is keeping the peace in Bosnia. It is helping Macedonia avoid civil strife. It has acted as a midwife to Montenegro's peaceful detachment from Serbia. In Kosovo, too, it is a key player. Its role in the months ahead could make all the difference between success and failure. I hope that the Minister will be able to tell the House how Her Majesty's Government intend to ensure that the EU remains united and effective in its policy towards Kosovo in the period ahead.

Lord Wallace of Saltaire: My Lords, I rise with some hesitation to speak on a subject on which both the noble Lord, Lord Hannay, and my noble friend Lord Ashdown know a great deal more than I.
	I taught a number of students from this area, Serbs, Albanians, Macedonians and Bosnians, together in the mid-1990s. One of them, a SerbwholearnedAlbanian, went on to write her PhD thesis, "The Parallel State in Kosovo", from which I learnt a great deal about the pains of that area and, as my noble friend Lord Ashdown, said, the sheer impossibility of putting back Serbian control of Kosovo. Tremendous problems are caused by the refusal of Serbian nationalists to see where they have reached after many years of gross mistakes by their leaders. Unfortunately, that is where we are.
	I also remember seeing in a Ministry of Defence briefing during the Kosovo war a map of Ulster superimposed over one of Kosovo. The geographical similarities were pointed out, which led to the depressing thought that there were probably political similarities as well. The Balkans are now off the front page here and in the rest of Europe, but as has been said, the problems are still very much there and will come back to bite the rest of Europe unless they are effectively dealt with. I join my noble friend Lord Ashdown in complimenting Her Majesty's Government on continuing to pay attention to this problem when some European Governments have begun to look elsewhere, much as the British Government attempted to hold attention on Cyprus for many years when European Governments preferred not to do so. I wish only that British Ministers spent more time going round the rest of the European Union explaining why we need an effective common foreign and security policy and what the real problems are with which we should be dealing rather than spending too much time in Washington and elsewhere and neglecting making the case here and on the Continent for effective European co-operation.
	We all agree that the alternative outcomes are much worse. I recall that another of my students, who was studying Turkey and Europe, told me happily one day that we had to understand that the Albanian mafia was causing the Turkish mafia to lose control of the heroin trade in the part of north London in which she was living because they were prepared to be much more violent than the Turks. We know that drugs, people smuggling and all sorts of trans-national organised crime has and will come from that region unless we manage to incorporate it in a larger entity. I am not entirely clear what is meant by conditional independence for Kosovo. The only form of conditional independence that I really understand in this context is that of becoming a member of the European Union, which is a form of conditional independence. That prospect is not very happily received in this country but it is probably the best that we can hope for the western Balkans.
	The western Balkans have to be contained in the European Union. They are now surrounded by the European Union, or they will be when Bulgaria and Romania come in in January. To leave them outside is to leave some weak and unviable states causing problems in a wider Europe. I am extremely unhappy about the proliferation of weak and tiny states—Montenegro, Macedonia, Albania, Kosovo and Bosnia; we are not entirely sure yet what Serbia will emerge as—which will have to be contained in an EU that will have to have rather stronger institutional and political monitoring arrangements as they come in. I hope that Her Majesty's Government will also consider, as they react to the 50th anniversary declaration of the European Union in which fellow Governments will no doubt wish to say something about returning to institutional reform, that if we have a larger number of very small states coming in to the European Union in the next 10 years that will force further institutional reform. There are positive reasons why Her Majesty's Government should be prepared even to tell the editor of the Daily Mail, and possibly even the editor of the Sun, that some institutional reforms are in Britain's interests.
	A number of speakers have already spoken about the Contact Group and about the Russian element. The noble Lord, Lord Hannay, if I understood him correctly, dared to suggest that Russian policy on this might possibly be rational. In the conversations that I have had with people in Moscow over the past three or four years about the southern caucuses, rationality, rather than emotion, has been in very short supply. The ability of the Russians to argue that, of course, Abkhazia and South Ossetia can become independent but no such implications carry any weight for any part of the north caucuses is part of the problem that we have in dealing with the frozen conflicts. We have to try as far as we can to carry the Russians with us on Kosovo. That probably requires us to say rather more about what we mean by "conditional independence" than we have yet agreed.
	The problem of Serbia itself remains. We have to continue to work with the Serbian Government and with young Serbs as far as we can. I am very happy that we have a number of very bright young Serbians studying in this country at present; it is exactly the sort of thing that we should be encouraging. The Foreign Office should be wondering whether it can provide more Chevening scholarships for good young Serbs to come here. We need, as far as possible, to end their sense of victimhood, isolation and of being cut off from the rest of Europe, which is so much the problem in Belgrade, Niš and elsewhere.
	I end by coming back to the question that has been put in all three previous speeches; that is, what is the role for the European Union and has the European Union collectively understood fully how large a task it is taking on—Her Majesty's Government carries a share of the responsibility for this—as it takes on more of what the UN was undertaking for the first few years? That has to be, alongside the continuing situation in Bosnia, a major responsibility, and it will cost money. It will require political attention and other sorts of resources. I would very much like the Minister to assure us, as he winds up, that Her Majesty's Government will be saying that openly and publicly to their colleagues in the other 24 member states.

Baroness Rawlings: My Lords, I congratulate the noble Lord, Lord Anderson of Swansea, on securing this debate. It has enabled your Lordships' House to consider the current hiatus in moves to decide Kosovo's future status. With such distinguished speakers, we would expect no less in your Lordships' House. In some ways it is ironic that the manoeuvring that triggered the first war and the break-up of Yugoslavia began in Kosovo in 1989, when Slobodan Milosevic scrapped the Serbian province's autonomous status. Now we have turned full circle back to negotiations over Kosovo's independence. I declare an interest as a member of the British Association for Central and Eastern Europe (BACEE), run superbly by Nicholas Jarrold. We have been aware that this period will be one of crucial decisions for Kosovo and the Balkans. The United Nations-sponsored final status talks have started, and after more than six years of UN rule it is time for the people of Kosovo—Albanian and Serb alike—to be given a chance to define their future.
	Together with the United Nations and our European partners, we support a process that will determine Kosovo's future status. It will require Kosovo's leadership to continue progress on the UN-endorsed standards that are designed to make certain the basic values of multi-ethnicity, democracy and market orientation, while placing Kosovo decisively on the path to integration with Europe. The Kosovo Serb community and the Government of Serbia and Montenegro must also assume a heavy share of responsibility for successful negotiations. Belgrade should help Kosovo's Serbs make certain that they will have a place in whatever political structure emerges.
	No one can deny that Kosovo is an emotional matter for the Serbs. Historically, it lay at the heart of Serbia's medieval empire. It is where they lost a battle in 1389 that led to 500 years of Ottoman rule and it contains some of their main religious sites. It is a Serbian province, rather than an ex-Yugoslav republic, such as Montenegro. Indeed, the new Serbian constitution, as summarised by Dana, a Serbian daily paper,
	"promised a Kosovo in Serbia and a Serbia in Europe".
	The paper went on to note that,
	"it is hard to tell which is further away".
	That statement currently rings true, given that over90 per cent of Kosovo's 2 million people are ethnic Albanians who will settle only for independence, and opinion polls show that although most Serbs would like the position to which the constitution aspires, too few believe that independence can be prevented.
	As noble Lords have highlighted, the Serbian constitutional referendum and the forthcoming legislative elections have been a tactical delay of the UN Secretary-General's special envoy. The report sets out proposals that were originally due at the end of this year. While the current postponement has been made in agreement with members of the Contact Group, we support, as did the noble Lord, Lord Ashdown, in his eloquent speech, Martii Ahtisaari's resistance to being further delayed until after a future Serbian presidential election.
	Sources suggest that Mr Ahtisaari's proposals are likely to be along the lines of an independent Kosovo, but with a continuing international presence to protect minority rights, as was stressed by the noble Lord, Lord Hannay. Can the Minister indicate whether the Government have considered this option ahead of the report's publication and whether they have had any discussions with key partners about the possibility of a continuing international presence and its consistency? What consideration have they given to the views of Kosovo's politicians on a continuing international presence?
	The noble Lord, Lord Hannay, said that there could be no doubt that Russia's reaction as a member of the Contact Group would be a key factor in the final outcome for Kosovo's independence. I totally agree with him. Russia will doubtless be assessing the precedent that might be set for both Chechnya, which it wishes to hold on to, and the Georgian provinces of Abkhazia and South Ossetia, as well as assessing their views on a potential NATO and EU presence. What discussions have Her Majesty's Government had with Serbia's traditional ally on these issues, and what assessment have they made of Russia's current thinking?
	Several factors could influence the current impasse in the moves for Kosovo's independence. Prime Minister Kostunica highlighted that Serbia will seek international financial support, should independence lead to an influx of a large number of Serbian refugees into Serbia. Have Her Majesty's Government given any undertakings in this respect?
	Meanwhile, the Economist recently cited concerns that, even if there is independence, the Serb-inhabited north of Kosovo will ignore it and continue to operate as it does now as part of Serbia. There may be a need to redraw municipal boundaries and to give full protection for all religious sites. It is clear that a nasty side effect of independence could be a further strengthening of nationalistic parties, raising the risk of trouble spreading once again through this already war-torn region.
	As noble Lords have said, it is time for the EU to take up the mantle from the UN and NATO, and to play a firm and decisive role to try and move towards independence in a consensual manner, which is reasonably possible.

Lord Triesman: My Lords, we adhere to that agreement, and we will press others to adhere to it as well. That is the straightforward answer.
	May I set out the context of the debate with a brief update on where the UN-led status process has reached? The process was launched a year ago following a report to the UN Security Council by the Norwegian diplomat Kai Eide—I hope I have pronounced his name reasonably competently—which concluded that the status quo was unsustainable. There would never be a good time to resolve this difficult and complex problem, and therefore the international community should meet its responsibilities by gripping it now. The Foreign Affairs Committee in another place reached a similar conclusion in its report last year, judging that deferring a decision on Kosovo's status would serve only to make it increasingly unstable and hostile towards the international community.
	Last month, the UN special envoy and former Finnish President, Martti Ahtisaari, announced his decision to adjust his envisaged end-of-2006 timetable and to present his proposal for a status settlement to Belgrade and Pristina without delay following parliamentary elections in Serbia on 21 January. I have mentioned our adherence to that timeline, and Her Majesty's Government fully support that decision. We recognise the case for deconflicting the final stages of a difficult status process from the elections in Serbia. Equally, we believe that any delay to the process should be strictly limited, and we therefore also support former President Ahtisaari's intention not to delay further to allow time for a new Government to be formed or for presidential elections to be held.
	We expect that, having engaged with the parties over his proposals, the special envoy will present his recommendations to the Security Council. We recognise that this is a sensitive matter. The special envoy's proposals will no doubt be the subject of detailed discussion in the UN Security Council. However, we believe that the international community should back his recommendations. As has been said in this debate, Ahtisaari brings great experience and judgment to his work. We have every confidence in him to deliver a series of recommendations that provide for the most viable way forward for Kosovo and for the stability of the Balkan region as a whole. As a member of the Contact Group and a permanent member of the Security Council, the United Kingdom has a key role in supporting the special envoy throughout the process and in encouraging the international community to be decisive about following up on Ahtisaari's recommendations.
	I am well aware, as is the House—noble Lords have mentioned it—of Chinese and Russian concerns. We have noted recent statements from Moscow indicating opposition to an imposed settlement, but we have also been working with Russia in the Contact Group throughout the process. As part of that group, Russia has accepted that any settlement should be acceptable to the people of Kosovo and that striving for a negotiated settlement should not obscure the fact that no party should be allowed unilaterally to block progress. We will strive to maintain close co-operation throughout the end-game, although, given the way in which the Russians have described these matters, I do not imagine that it will be easy.
	However, the Russians need to understand, as I believe the House has understood—my noble friend Lord Anderson and the noble Lord, Lord Hannay, made this point—that every post-conflict situation is different. There is no universal blueprint for dealing with frozen conflicts exactly along the lines of Kosovo; they are all different. Kosovo is unique because of Milosevic's unconstitutional abolition of its autonomy in 1989, his regime's brutal oppression of the Kosovo Albanians throughout the 1990s, the systematic ethnic cleansing of 1999, the NATO campaign of that year, and UNSCR 1244, giving the UN Security Council the central role. In my judgment, it would be far better for Russia to look at the situation in that way—as being distinct for those distinct reasons—without trying to produce an artificial conflation with a series of wholly unrelated issues.
	It is for President Ahtisaari to make his recommendations on the possible outcomes of the status process, and, as I said, he will have our full and unequivocal support. Our firm hope is that we can achieve all this through a negotiated agreement. But, if the UN special envoy's view is that an agreed settlement is not possible, the international community must be prepared to draw the necessary conclusions and face its responsibilities.
	The Contact Group has set out the conditions for the negotiating process and the outcome in a set of guiding principles endorsed by the Security Council and in a ministerial statement following a meeting in London in January. Those texts make it clear that Kosovo cannot return to the situation before 1999; it cannot be partitioned; it cannot, as I said earlier, join in union with any or part of any other country; and the settlement must be acceptable to the people of Kosovo.
	The texts also stipulate that, having started, the process cannot be blocked. We would ideally like to see an agreed settlement, but we need to be realistic about the prospects for that in view of the limited flexibility displayed by both parties, particularly by Belgrade, during Ahtisaari's negotiations. In our view, there is nothing to be gained by protracting the process because one or both parties refuse to engage constructively, but there is a considerable risk of instability and unrest if the negotiations become bogged down or open-ended. In the interests of Kosovo, and of the region as a whole, it is important that the status process concludes as soon as possible and in a way which achieves a sustainable, democratic, multi-ethnic Kosovo.
	It is of course not for me to pre-judge what the UN special envoy's recommendations will be. I say to the noble Lords, Lord Anderson and Lord Wallace, that the costs that the EU may bear will largely turn on the detail of those recommendations. The EU will assess those matters in some detail when we are a little more certain of the totality of the recommendations. However, there is growing consensus on the part of many observers that any settlement is likely to be based on some form of independence for Kosovo, supervised by a robust international civilian and military presence and with cast-iron guarantees protecting the rights and security of the Kosovo Serbs and other minorities, as the noble Baroness, Lady Rawlings, and other noble Lords have stated. Such an outcome would be consistent with the guiding principles and ministerial statement agreed by the Contact Group. It is difficult to identify alternative options providing a better basis for Kosovo's democratic future and for wider regional stability.
	I accept the description of the noble Lord, Lord Wallace, of the pattern of weaker states in the area and what may be needed. I believe, as I think he says, that they will be weaker and continue to be weaker if outside the EU in the long run and potentially stronger if they are inside it and within this family, although on this occasion I will not be drawn on the European constitution.
	In our view, a key part of this negotiation ought to be about how a settlement can ensure that the Kosovo Serbs and other minorities can have a secure future in a multi-ethnic Kosovo. The UN special envoy, with our full support, has been devoting continuous energy to negotiating a set of provisions which, taken together, should provide solid guarantees for the Serbs and other minority communities in Kosovo, and which would provide them with a generous measure of local self-government. As others have said, that is very important. These provisions could include continued transparent links with Belgrade; horizontal links between Serb majority municipalities; and special arrangements in the areas of law enforcement, education, health, and protection of religious heritage sites. We believe that such guarantees, combined with the international presence to ensure the implementation of these provisions of the settlement, could lay the foundations for a multi-ethnic and democratic Kosovo capable, over time, of entering the European family.
	Noble Lords, particularly the noble Lord,Lord Anderson, have asked about what the United Kingdom will do to help. We are focusing on Kosovo in the context of the joint Foreign Office/Ministryof Defence/DfID programme budgets. Kosovo has been allocated £2.1 million from the Global Conflict Prevention Pool for the financial year 2006-07.In addition, the FCO's Global OpportunitiesFund Reuniting Europe programme has allocated £0.5 million to Serbia. It also has access to the Balkans civil democracy fund worth £700,000.
	With international partners and Kosovo authorities, we play a prominent role in mentoring and in monitoring the issues of combating human trafficking and other aspects of organised crime in Kosovo and the region. We have recently provided a sophisticated witness protection system and equipment, which I understand is now widely used in Kosovo and elsewhere to bring criminals to justice.
	The British office in Pristina has bid to the Global Conflict Prevention Pool for a contribution for a joint project with the Swedish Government and the UNDP on small arms—another issue that the noble Lord, Lord Anderson, raised. The project's objective is to collect and destroy small arms, light weapons, ammunition and explosives that have been seized in Kosovo. The project will also train and equip a team from the Kosovo police service to carry out properly audited, accountable destruction of such material in the future. Provided that approval is given for the final stage, the project will begin before the end of the year.
	Unfortunately, the course of negotiations so far clearly indicates that Belgrade remains fixated on the retention of sovereignty over Kosovo. Of course, anyone familiar with the history of the region—the noble Baroness, Lady Rawlings, took us back to a decisive battle; I have the precise date in my briefing notes, but I will not trouble the House with it—understands the special place that Kosovo has in the history, culture and religion of the Serb people. There must be an understanding of that. No one in the international community wants to humiliate Serbia. For the first time, Serbia is being offered the prosperity and security that would come with membership of the EU and NATO. NATO took the decision at the Riga summit to invite Serbia to join the Partnership for Peace. I expect this week's European Council to send a warm signal to Serbia of the EU's continued commitment to Serbia's EU perspective.
	It is time for Serbia to look to the future, not—as the noble Lord, Lord Ashdown, rightly said—to be so fixated on the past. To accept that regional stability requires a settlement acceptable to the people of Kosovo must be in Serbian minds. Events since 1989 have created political realities and shaped public attitudes in such a way that Kosovo could never realistically be ruled from Belgrade again. For its own sake, and that of the Serbian community in Kosovo, Belgrade needs to rethink its approach. The international community did not fully grasp this in 1999. Let us grasp it now.
	The British military has been in Kosovo since 1999, and we remain, playing a key role in KFOR. We also maintain a substantial civilian presence there, with a significant diplomatic representation, as well as contributing to economic development and policing and providing advice and assistance to political and community leaders. Our engagement is not simply political, although that is important. We are intensively involved in both civilian and military work on the ground in Kosovo, aimed at delivering security, stability and progress on standards.
	It is a demanding challenge. I say to the noble Lord, Lord Anderson, that NATO is bound to continue to deploy KFOR for the foreseeable future. KFOR, UNMIK and the Kosovan authorities are preparing in a co-ordinated way for what is bound to be a tense period following the settlement. In a more general sense, that is true not only of NATO but of the EU presence, which the noble Baroness, Lady Rawlings, rightly says must be there, helping to structure the future.
	In conclusion, I doubt that anybody in the House—particularly given the history and the wasted and missed opportunities of 1999—pretends that there is a perfect solution. Equally, we must be clear that resting on the status quo—in effect, a UN protectorate under the terms of UNSCR 1244—is not the right option. We therefore need to give our full support to the UN status process led by Ahtisaari. Once he delivers his recommendations, we must be completely resolute in taking them forward. It will, for sure, be difficult. It will be easy to point to the problems that could take the process away from a conclusion, but we must be aware that there will never be an easy time to do this. It is much better to make the move now, rather than camping on the fragile status quo, which would be the worst option for the area's security.
	Our vision for the future of the western Balkans is to see steady progress towards European and Euro-Atlantic integration. The noble Lord, Lord Hannay, asked specifically about the European Union andthe European Council meeting. Enlargement is on the agenda this week, and the UK will press forward. The noble Lord, Lord Wallace, asked whether we were really committed to it. I promise that there is no end to the trouble that my colleagues and I have gone to. My right honourable friends Douglas Alexander and Geoff Hoon have been deeply involved in precisely this issue, and Geoff Hoon was most recently in the region on7 November. We are working hard with EU partners to ensure that the EU's response to this major UN process in Europe will be neither hesitant nor divided. To achieve that, we need a complete resolution of the legacy issues from the break-up of former Yugoslavia. I suspect that Kosovo is the major outstanding issue. It is in the interest of Europe as a whole that we resolve it in a way that enhances democracy, stability, prosperity and multi-ethnicity in Kosovo, Serbia and the region as a whole. We shall carry on pressing for those objectives because they are the objectives of the Parliament of the United Kingdom and they are right for the countries involved.